Holding Alternative Investments in a Roth IRA

The typical stereotype when opening an IRA account is that all underlying investments must be exchange traded stocks, bonds, and mutual funds. Stock market volatility frequently intimidates retirement investors to the point that they simply do nothing and forego crucial retirement planning. Roth IRA account owners will be pleased to know there is an entire spectrum of alternative investments unrelated to the stock market that can be held under a ROTH umbrella. 

Before opening a Roth IRA with the intention of holding alternative investments, be certain that your intended Roth IRA custodian is willing to work with you. The most common type of custodian allowing alternative investments specializes in what are called “self-directed IRA accounts.” Self-directed IRA providers are a small but growing niche. Let’s take a look at the applicable Roth IRA rules with regard to acceptable and prohibited alternative investments.
 
Acceptable Roth IRA Alternative Investments
A common alternative investment held in Roth IRAs is real estate. Just about any type of real estate can be held in a Roth IRA including single family homes, apartment complexes, and commercial buildings. It’s important to note that Roth IRA investments are not for personal use and must be held for investment purposes only. The funds used to purchase real estate must originate from a Roth IRA account but non-recourse financing opportunities are an option. Existing real estate assets cannot be transferred into the ROTH IRA account. Other broad categories of alternative investments include, but are not limited to: 
 
  • Promissory Notes
  • Private Equity
  • Shares of a Business (Non S-Corp)
  • Oil & Gas
  • Precious Metals 
Prohibited Roth IRA Alternative Investments

With so many accepted Roth IRA investment alternatives you may be wondering what isn’t allowed? There are three such investment types:
 
  • Collectibles. This category includes artwork, rugs, antiques, metals, gems, stamps, non-marketable coins, alcoholic beverages, and certain other tangible personal property. These types of investments are ruled out because valuations are often difficult to achieve on a regular basis and IRA rules demand regular account value reporting for tax purposes.
  • Life Insurance. Because an IRA account is not a human being, it becomes difficult to own and administer life insurance and is therefore prohibited. 
  • Shares of an S-corporation. S-corporations follow specific IRS taxation requirements and the tax-deferred nature of a traditional IRA or Roth IRA would go against those requirements. 
It is highly recommended that an investor keep on top of all applicable IRA rules when investing inalternative assets. One false step may result in IRS penalties which is why many self-directed Roth IRA owners rely on the guidance of their trusted custodian. 

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