IRAs Gone Wild

Here’s how to invest your retirement account in private equity, real estate or gold—without a tax penalty flag.

- Ashlea Ebeling

A record $7.5 trillion is sitting in individual retirement accounts, the bull market is looking tired, and the Internal Revenue Service’s army of auditors has been shrinking. So the temptation to get creative with IRA money has never been greater and the marketing pitches never more pervasive. You can put real estate, private equity, private loans and even gold coins and bullion (but not collectibles or insurance) in a tax-deferred IRA or a Roth IRA, where all growth is tax-free. You do this through a “self-directed” IRA—which is simply one parked at a custodian that allows you to invest in alternative assets.

But the tax rules surrounding self-directed IRAs are tricky, the penalties for violations can be punishing, and the IRS recently started requiring custodians, in their annual filings, to flag accounts holding alternative assets. At the same time Congress’ Government Accountability Office is studying self-directed IRAs to see how they’re used and if more restrictions are needed.

Seattle tax attorney Warren L. Baker, 37, has spent a decade building a national practice advising owners of self-directed IRAs. He sees both the potential and the peril. One client inherited a $10 million IRA that has grown into a $50 million IRA largely through private equity investments. Another turned a $200,000 Roth IRA into a $10 million tax-free retirement kitty by buying raw land on the edge of a Midwestern city, selling at a profit and investing in more land.

“For the real estate guy driving around looking for deals, it’s not that much of a stretch for him to have his IRA buy property,’’ Baker says, adding that his typical client prefers investing in areas where he has expertise over investing in the broad stock market.