What Are Alternative IRA Investments?

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Last Updated on: 5th July 2021, 10:51 pm

Since their introduction in 1974 via the Employee Retirement Income Security Act, individual retirement accounts (IRAs) have been America’s go-to retirement saving vehicle alongside employer-sponsored 401(k)s. Today, at least 43.9 million U.S. households own one or multiple IRAs. If your household isn't included among them, you could be bleeding cash every year to unnecessary taxes on your capital gains. 

Not only do IRAs provide tax benefits for long-term investors, but they also offer much more diversity than regular 401(k)s. There are many alternative IRA investments that can be included in a self-directed account, including precious metals, real estate, cryptocurrency, and much more. 

In this article, we’ll explore what alternative options are available to retirement investors through self-directed IRAs. If you’re unsure whether alternatives are right for you, we’ll also take a look at the benefits (and potential risks) of investing in alternative assets. 

IRA Account Types: Roth, Traditional, and Self-Directed

There's no one-size-fits-all approach to IRA investing. How you invest with your IRA depends on the type of account you choose to open, since there are multiple options available to investors. 

The most common type of IRA is the Traditional IRA, which can be contributed to until the account holder reaches the age of 70.5 years. The taxes on all earnings within these accounts are tax-deferred, which means they aren't touched by Uncle Sam until the funds are withdrawn during retirement. 

The second category of IRA is the Roth IRA, which, like its Traditional counterpart, can be contributed to until the age of 70.5 and has an annual limit of $6,000 for tax year 2021. The key difference is that these accounts are tax-free, meaning they are made up of after-tax dollars and therefore all gains within the account go untaxed at their time of withdrawal.

Note that both account types have 10% early withdrawal penalties that apply to funds pulled out from an IRA by investors before they’ve reached the minimum age of 59.5. 

The Value of Self-Directed IRAs for Alternative Investments

Many self-employed people choose IRAs as a substitute for a 401(k) that they otherwise would’ve had with an employer. However, many self-employed individuals and employees open IRAs to supplement their existing retirement accounts with more diverse holdings—remember, there's no limit on the number of IRAs you can open. 

Unlike brokerage accounts, a self-directed IRA is an IRA that is fully managed and controlled by the account owner rather than a third-party administrator such as Fidelity or Vanguard. Self-directed IRAs can be either Roth or Traditional and can include which alternative IRA investments the account holder deems fit for their needs. 

Eligible Alternative IRA Investments

Typically, there are six broad asset classes that can be included in an IRA:

• Equities
• Bonds and fixed-income assets
• Securitized funds (i.e., mutual or index funds)
• Real estate
• Cash and cash-like assets
• Commodities

An ordinary brokerage IRA typically contains some combination of the first three assets listed above. However, few if any brokerages will permit their customers to diversify their investments across a broad variety of alternatives. Investments such as real estate, cryptocurrency, and precious metals are rarely found in typical IRAs. 

To invest in alternative assets, a self-directed IRA is often needed. Self-directed IRA companies offer full checkbook control for customers, meaning account holders have maximum flexibility when it comes to devising their own retirement plans. Account holders with checkbook control have full responsibility for the assets in which they invest.

Self-directed IRA alternative investments can take many forms. Below is a shortlist of some of the alternative retirement investments available to self-directed IRA investors:

• Cryptocurrencies (e.g., Ethereum or Bitcoin IRAs)
• Real estate and other real assets
• Precious metals (e.g., gold, silver, or platinum-group bullion)
• Certificates of deposit
• Hedge fund
• Annuities

Rules and Restrictions for Alternative IRA Investing

Both Traditional and Roth IRA alternative investments include real assets, commodities, derivatives, and options without any variation in eligibility between the account types. However, both accounts are subject to rules and regulations imposed by the IRS. 

This is especially true regarding real asset storage requirements. Under federal law, all real assets, and particularly precious metals bullion, must be held in trust by an IRS-approved third-party custodian. 

To ensure you don’t get on the IRS’s bad side, make sure you choose a gold IRA provider that's fully compliant with federal storage and maintenance regulations. To make your search easier, we’ve put together a list of the best gold IRA storage options. For more information, read our comprehensive guide to gold IRA rules. 

Ineligible Investment Options for IRAs

The IRS specifies several categories of investment products that cannot be included in an IRA. Even if they hold monetary value, there are several prohibited transactions defined by the IRS that limit what types of assets can be included in an IRA, 401(k), or any other tax-advantaged retirement vehicle.

Most of the IRS’s prohibited assets are collectibles. Broadly defined, “collectibles” includes the following asset categories:

• Fine art
• Stamps
• Rare gems
• Numismatic coins
• Wine and spirits
• Antique artifacts
• Designer clothing

While it is legal to invest in the assets listed above, it's important to note that they cannot be included in any type of IRA. The same is true of life insurance products, which are also banned. Alternatively, you’re allowed to cash out your life insurance claim and add the monetary value of the claim to an IRA in the form of cash. 

Safeguard Your Retirement With Alternative Investing

We’re often asked, “Are alternative investments good for retirement investors?” The answer is a resounding yes. Investing in a diverse range of non-correlated assets in a tax-advantaged retirement account can save you thousands in taxes. Plus, in the event of a market downturn, a diverse portfolio will let you hang onto more of your hard-earned wealth.

Alternative IRA investments are a smart, risk-conscious addition to a retirement investor’s portfolio. Whether you think an IRA is right for you, or you’re interested in an alternative account type, check out our list of the best retirement accounts. You aren't just limited to IRAs and 401(k)s to save for your retirement. Don't wait, start investing today!