The High-Risk Way to Make Your IRA Shine

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The best tool you have to save for retirement is your IRA. Tax-favored retirement accounts like IRAs give you huge tax benefits that can add tens or even hundreds of thousands of dollars to your final retirement nest egg over time.

Unfortunately, many baby boomers waited until late in their careers to start thinking seriously about setting money aside for their retirement years. For them, the lackluster returns that stocks have offered in recent years aren't attractive enough to give them a fighting chance at the dream retirement they want. That's driving up demand for something known as the alternative-asset IRA, which gives you access to unique investments you might never have imagined buying.

Giving you alternatives
The alternative-asset IRA isn't a new phenomenon. Once known by the confusing moniker of "self-directed IRAs," alternative-asset IRAs let you go beyond stocks and mutual funds to push the limits of what the IRS will allow you to own in a retirement account. You can put all sorts of investments in an alternative-asset IRA, including real estate, timberland, private business interests, royalty interests in oil and gas wells, and certain types of precious metals.

As you'd expect, winners from alternative-asset IRAs believe that they offer a huge advantage over more traditional holdings in retirement accounts. Although many of the investments you'll find inside alternative-asset IRAs require a much longer-term commitment than a stock or mutual fund that you can sell anytime you want, the right picks offer the potential for huge returns.

Looking out for pitfalls
Those returns come with some complications, however. First and foremost, you have to find a financial institution that's willing to act as IRA custodian for unconventional assets. That can be difficult, and although specialized companies have built a niche business out of catering to alternative-asset IRA owners, you have to be aware of the fees you'll be charged.

More important, the laws governing IRAs are quite complicated, and it's important to make sure you don't run afoul of any legal requirements. For example, the self-dealing rules that cover IRAs bar any personal enjoyment of property held in your IRA. So making the mistake of putting your own vacation home into an IRA can put the status of your entire retirement account at risk. Other so-called prohibited transactions, such as fixing up a rental property held in your IRA, raise similar potential problems.

Alternatives to alternative-asset IRAs
If all that sounds scarier than you'd like to deal with, don't give up hope. You can find reasonable ways to take advantage of these investing trends without going to the lengths of opening an alternative-asset IRA. For instance:

  • For oil and gas investors, royalty trusts pay you a return based on energy production in a given area. BP Prudhoe Bay (NYS: BPT) is tied to the production levels on Alaska's North Slope. Similarly, small oil and gas production companies often profit from the same booms as royalty owners -- look no further than tiny Samson Oil & Gas (ASE: SSN) for an example of a small-cap stock investment poised to profit from success in the Bakken and Niobrara shale plays of the north central U.S.
  • Similarly, timber and forest-products REITWeyerhaeuser (NYS: WY) has many similar characteristics to raw timberland. You won't be able to drill down to specialized types of trees, but a diversified portfolio will give you smoother returns over the years.
  • For precious metals investors, the ETF iShares Silver Trust (NYS: SLV) and the closed-end fund Central Fund of Canada (ASE: CEF) offer shares that represent a proportional interest in gold or silver bullion that the funds own. Over time, their share prices move roughly in line with the precious metals markets.

The downside, though, is that no publicly traded investment can give you the raw profit potential that a single specific asset can. So if you really think you can hit the jackpot, then going to the trouble and expense of setting up an alternative-asset IRA may be worth it for you. But few investors should put more than a small portion of their overall retirement assets into alternative assets -- or else you might end up learning the hard way just how risky they can be.

Stocks may not have the glamour that a unique physical asset has, but they can put you on the path toward a prosperous retirement. Learn more on the subject by reading the Motley Fool's latest special report on retirement, which highlights three promising stock picks for retirement investors. It's absolutely free, but only for a limited time, so read it today while it's still available.

At the time this article was published Fool contributor Dan Caplinger doesn't take unnecessary risks. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Weyerhaeuser. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always shines.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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