You can use your IRA to buy a house. But should you?

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Are you looking to invest in a fantastic rock-and-roll camp or buy horses or cows with the money you have on your retirement account? If so, you may want to consider a self-directed IRA.

Traditional IRAs limit what you can own – usually only shares, bonds, mutual funds, ETFs and certificates of deposit. Self-directed IRAs offer the same tax-deferred growth, but facilitate the ownership of a much wider range of investments: real estate, private equity, some small businesses, cryptocurrencies and precious metals (such as gold bricks). The owner of the IRA controls all investment decisions and the self-directed IRA is itself owned by a custodian, usually a trust company. Most large brokerage firms do not offer self-directed IRAs given their risk and complexity.

"Self-directed IRAs expand your opportunities for unconventional assets," says John Campbell, senior wealth strategist at U.S. Bank Private Wealth Management. "It gives wealthy clients the opportunity to invest in things normally excluded from an IRA."

But there are many limits and risks.

First, by definition, assets that need to be integrated with a self-directed IRA are much more difficult to measure. "Since assets are private, there is not much public information about them," says Rich Ramassini, Strategy Director at PNC Investments. "So, expertise in assets is essential."

You must provide annual assessments of your IRA to the IRS. You must obtain an independent evaluation of the IRA from a professional or expert in the relevant field, county or state taxation records or, sometimes, an online source. The minimum distributions required apply to self-directed IRAs, such as for traditional IRAs, which means you need money to fund the DMR, or you can withdraw enough money from your money. a traditional IRA to cover it.

You can not derive any personal benefit from the assets when they are in the IRA. This means that no collectibles, life insurance policies or real estate that you or your family members occupy while you are in the IRA. If you buy a yacht in the IRA, you can not set foot there. Neither can your children.

A ban on insider trading also takes you away from your assets. If you buy a property, it will probably have to be repaired at some point. You can not perform this repair yourself and you must pay for the repair from the IRA, not from your own pocket. This means that you have to leave cash reserves in the IRA or sell an asset in the IRA when you need cash.

But remember that the assets of your IRA will probably be illiquid and therefore difficult to sell. "Most of the time, when it comes to private investment, the friction ribs are higher," says Ramassini.

This partly explains why child care costs are generally much higher for self-directed IRAs than for traditional IRAs. Suppose you create a standalone IRA to invest in real estate at the Millennium Trust Co. of Oak Brook, Illinois. You will pay an annual account fee of $ 100, an annual retention fee of $ 600 for each property and a $ 350 fee for the purchase or sale of a property.

"If you want to get a higher return that more than offsets higher fees, that's your tradeoff," said Campbell.