Why to Choose a Self-Directed IRA

Interested in a retirement-friendly, tax-deferred way to invest in, say, reality TV? How about a beach house in Malibu or a burger franchise in Eastern Europe? Well, self-directed IRAs can help.

Unlike traditional IRAs that limit investors to stocks, mutual funds and bonds, this alternative account allows for a broader, more creative range of assets, including real estate, private equity, foreign companies and even racehorses.

David Cole, a developer in Fort Worth, Texas, recently rolled over part of his retirement fund into a self-directed IRA. Now, he's investing in two real estate development projects and a reality TV series. "My purpose was twofold," says Cole, 44. "I wanted to take advantage of opportunities in real estate and defer the taxes, [as well as] diversify away from the stock market."

The payoff from a self-directed IRA can be higher than an average mutual fund, but the related dangers may be greater as well, experts say, because it's not as diversified as a basket of stocks, funds and bonds.

"The higher leveraged you are in any investment, the greater the risk," says Nora Peterson, author of Retire Rich With Your Self-Directed IRA. "For example, if you've only got $2,000 and you buy someone's tax lien, it could be great. But if you haven't done your homework, the [entire] IRA can be lost."

Getting Started

The first step is pinpointing an alternative investment, and investors should rely mostly on their own judgment.

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