Jul 1, 2007 12:00 PM

, By David Sennett, independent fiduciary risk consultant, Delray Beach, Fla.

By David Sennett, independent fiduciary risk consultant, Delray Beach, Fla.

Trustees of individual retirement accounts (IRAs) have increasingly seen participants turning to nontraditional or alternative investments in their accounts. These investments include not only real estate but also mortgages and closely held entities such as limited partnerships (LPs) or hedge funds. In many cases, the IRA trustee can acquire these assets only upon the participant's direction. This arrangement, known as a self-directed IRA, leaves the trustee operating as a custodian with no discretion to manage the account's assets.¹

While an IRA may not own life insurance contracts or collectibles (with some exemptions), nothing in the Internal Revenue Code makes holding alternative investments impermissible per se.² Still, acquiring or selling an alternative investment poses three major risks to a self-directed IRA trustee: