Almost any type of investment is allowed within an IRA, including stocks, bonds, mutual funds, pensions, unit investment trusts (UITs), exchange traded funds (ETFs), and even real estate. An IRA can only be used to buy investment property, so you can’t build a house with the account, even if you intend to use it as a financial investment. An IRA or Solo 401 (k) can invest in real estate in many forms. Rental properties, whether residential, commercial or industrial, are very popular.
Agricultural properties such as farms and Timberland can be held in an IRA. Some investors choose to participate in small private real estate partnerships for the purchase of more expensive properties or even multi-family syndications. An IRA or 401 (k) can also invest in foreign real estate. Your IRA can’t invest in collectibles.
This includes works of art, stamps, carpets, cars, alcohol, certain metals, and other objects. Various custodian banks offer self-directed IRAs, which can own gold bars, silver bars, or even cryptocurrencies such as Bitcoin. Certain investors want the tax benefits of an IRA for investments in nontraditional asset classes for diversification or potentially more lucrative returns. You can choose to open a self-governing IRA, such as a traditional IRA, or a Roth IRA with the same pre- and post-tax contribution rules.
In addition, most custodian agreements between a self-managed IRA custodian and an investor explicitly state that the self-governing IRA custodian is not responsible for investment performance. If my IRA wants to buy a property and use the IRA as a down payment and take out a loan, that loan must be a non-recourse loan. Due to federal laws and regulatory requirements related to the sale of investment products or investment advice, most custodian banks limit IRA account holdings to company-approved stocks, bonds, mutual funds, and CDs for other types of IRAs. Self-directed IRAs allow investments in a wider — and potentially riskier — investment portfolio than other types of IRAs.
While this is not prohibited on the IRA side, there is another asset class in which an IRA cannot participate. All the money goes back into your IRA either tax-deferred or tax-free, depending on the makeup of your IRA. It’s important to remember that IRA funds (cash) are generally used to purchase the property. Additionally, the IRA owns the property and it can only be used for investment purposes. Your IRA balance must be pretty high, as taking out a mortgage to buy real estate within an IRA isn’t easy.
Unless you have the time and expertise to manage real estate, you’re probably best off with more general strategies for your IRA. A self-managed IRA is an IRA that is held by a custodian bank and allows investments in a wider range of assets than most IRA custodians allow. While self-directed IRAs may make sense for some savvy investors, they carry greater risks and drawbacks than standard IRAs. Common examples of IRAs include the traditional IRA, the Roth IRA, the Simplified Employee Pension (SEP) IRA, and the Savings Incentive Match Plan for Employees (SIMPLE) IRA.
If you spend even a single night in a rental property purchased with IRA funds, your entire self-governing IRA is no longer considered an IRA from the first day of the year.