We recently reviewed what investments you can hold in your Roth IRA. We shared the most common investments that Roth IRA providers offer (mutual funds, stocks, certificates of deposit, and so on). That’s the key — what your provider allows you to invest in. You may get a recommendation from a friend about some crazy new investment that you would love to sink part of your Roth IRA funds into. But if the provider doesn’t provide that investment option you’re out of luck (unless you open up a new account with a new provider). I would be shocked if your provider didn’t allow you to invest in any of the common investment options. It’s the exotic investments that you’ll likely need a special Roth IRA provider to have a shot at investing in.
Can I Invest in Exotic Investments with a Roth IRA?
The answer is the always fun “it depends”! Whether or not you can invest your Roth IRA contributions in exotic investments depends on:
- exactly what exotic investments you want to invest in
- whether or not your current Roth IRA provider has an option for those investments
What Exotic Investments Can I Invest My Roth IRA In?
Assuming your Roth IRA provider has the option for you to invest you can stick your money into crazy things like precious metals, real estate, annuities, penny stocks, and exchanged traded funds (ETFs) that focus on a very specific sector that hardly anyone is interested in. But your big name providers like Vanguard and Fidelity aren’t going to allow you the super exotic investment options. You might be able to pick through some wild ETFs or play in the lowest end of the stock market, but they aren’t set up to let you invest in real estate.
Where Can I Open a Self-Directed Roth IRA?
So if Vanguard, Fidelity, and the rest of the big names can’t give you access to exotic investments who can? Do a Google search for self-directed Roth IRA. Essentially there is no law that says your IRA funds have to be invested in traditional investments like stocks and bond mutual funds. There’s a great article in the New York Times on the rise of self-directed IRAs and I encourage you to check it out.
There are a lot of things you have to be aware of like the fine print in tax laws and whether or not you really know what you’re investing in. One clear thing is you can’t personally benefit from your investments. Now does that sound weird or what? But what it means is if you buy a four apartment building as an investment you can’t rent out three of the apartments and live in the fourth one. That’s a benefit, and that’s a major no-no in the IRS’ eyes. (You also can’t let anyone in your lineage live there, either.)
Exotic Investments are Risky
They wouldn’t be called exotic investments if they weren’t risky. With potential penalties like forfeiting the entire Roth IRA (see the NY Times article above) you’ve got to be really confident in what you’re doing. But if you’re confident, and you don’t mind a little bit of risk, you can earn some serious returns with those funds. I’m just not sure if it is for me quite yet. If I opted to try this out I wouldn’t dump my entire portfolio into a self-directed Roth IRA. I might cut out a chunk of 10% and give it a shot. That way you’re not risking your entire retirement on an exotic investment.