You can house alternative investments in your IRA—with a few exceptions. Here’s what investors need to know about IRA alternative investments.

401(k)s get the most attention, but it’s high time to give the IRA some love. It’s a great way for your nest egg to grow without annual interruptions from Uncle Sam, and such accounts don’t rely on an employer. Plus, if your tax bracket is lower upon retirement, an IRA can give you a tax advantage.

The catch? Not everything belongs in an IRA.

If you’re interested in branching out of the stock market, here’s what you need to know about IRA alternative investments.

Understanding Your IRA

First, it helps to understand how your IRA works.

An individual retirement account, or IRA, is a type of retirement account that allows account holders to save and invest for retirement in a tax-advantaged way. The type of tax advantage depends on the type of IRA—traditional IRAs grow on a tax-deferred basis until you start making withdrawals in retirement, while Roth IRAs grow tax-free with tax-free withdrawals.

The tax part often throws people for a loop. The simplest way to think of your IRA is a box containing various investments. The tax-advantaged status of the account is the walls of the box and does not affect what is contained inside beyond when it gets taxed. This means you can use an IRA to house almost any type of investment asset, including stocks, bonds, and exchange-traded funds, to name a few.

Can You Have Alternative Investments in Your IRA?

Here’s the even better news: you can have alternative investments in your IRA.

Remember, the IRA is essentially a deposit box for your retirement investments. The fact that you’re dealing with alternative investments isn’t an automatic disqualification. It only affects how those investments are taxed.

In simple terms, you can deposit almost anything in an IRA to grow under the IRA’s tax-advantaged umbrella. In fact, if you ask retirement advisors about what’s allowed in an IRA, they won’t list out what’s allowed—they instead list what is not allowed and offer a caveat that pretty much anything else is permissible.

Investments NOT Allowed in Your IRA

With that in mind, let’s talk about what investments are not allowed in an IRA per IRS publication 590-A. You’ll notice that several of these are alternative investments, but keep in mind that pretty much any other alternative investment is allowed.

Art, Antiques, and Collectibles

Let’s say you find a beautiful antique lurking in the back corner of a garage sale, or you invest in art and see fantastic gains. You want to shield those gains from taxes, so you consider dropping them in your IRA.

Bad news: IRAs are not allowed to hold collectibles of any kind. These include (but are not limited to):

• Art
• Antiques
• Baseball cards
• Comics
• Coins (mostly)
• Fine wine
• Gems and jewelry
• Metals
• Rugs
• Stamps
• Certain other forms of tangible property

This is not because the IRS wants you to invest outside of Renoirs. In the 1970s, the IRS discovered that IRAs were being used to shield art stolen in the Nazi era. The government did not want to provide a shield that would prevent stolen art from being reclaimed and disallowed art and collectibles.

Life Insurance

Life insurance is a bit of a sticky issue with IRAs.

Life insurance plans are allowed under qualified plans thanks to the incidental benefits rule. Under this rule, qualified plans are allowed to purchase a small amount of life insurance for a plan participant, but the death benefit amount must qualify as incidental compared to the plan balance. The IRS makes that determination based on the type of insurance purchased in the plan.

Otherwise, money in an IRA cannot be used to purchase a life insurance policy of any kind. You can’t house a plan purchased outside of the IRA either.

Derivatives Positions

A derivative is a type of financial contract whose value rests on the value of the underlying asset, the benchmark. These are complex alternative investments, and the rules around them are equally complex.

Any type of derivative trade with unlimited or undefined risk is prohibited by the IRS. However, IRA custodians frequently forbid derivatives of any kind simply because derivatives are risky, speculative assets that go against the retirement security mandate of an IRA.

Real Estate

Real estate is an equally complicated issue in IRAs. You can hold real estate in IRAs—sort of.

Under IRS rules, you are allowed to hold real estate in your IRA, including directly owned real estate. However, you cannot directly benefit from the property in any sense. For example, you cannot live in the property and you can’t earn rental income from it either.

Theoretically, self-directed IRAs give you greater freedom to invest in real estate, but they come with so many caveats and tax benefit loopholes that it’s frankly not worth the headache.

Interested in Alternative Investments Outside of Your IRA?

The good news? There are a lot of allowed IRA alternative investments, and plenty of ways to grow your wealth with alternative investments outside of an IRA.

Here at Masterworks, we’re on a mission to make blue-chip art investing accessible for everyone (outside of your IRA, of course!) We function as your expert partner in the art world, researching high growth artist markets with the best potential risk-adjusted returns and then handling the purchase and authentication. Then, members get to purchase shares in multi-million-dollar art for as little as $20 per share. Ready to grow your wealth for retirement while investing in something you love? Fill out your membership application today to learn more.