What You Can Invest in Inside an IRA

Individual Retirement Accounts (IRAs) offer powerful tax advantages for retirement savers, but many people don't realize just how flexible these accounts can be when it comes to investment options. While most IRA holders stick to traditional investments like stocks and mutual funds, the IRS actually permits a surprisingly wide range of assets to be held within an IRA. Understanding what you can—and cannot—invest in can help you build a more diversified retirement portfolio tailored to your financial goals and risk tolerance.

This comprehensive guide explores the full spectrum of IRA-eligible investments, from conventional securities to alternative assets, and explains the rules and restrictions you need to know before making investment decisions within your retirement account.

Traditional IRA Investments: Stocks, Bonds, and Funds

The vast majority of IRA assets are invested in traditional securities, and for good reason. These investments are liquid, well-regulated, and easy to manage through most brokerage platforms. Let's examine the most common investment types:

Individual Stocks

You can purchase shares of publicly traded companies within your IRA, giving you direct ownership in businesses you believe will grow over time. Stock investments offer potential for capital appreciation and dividend income, both of which grow tax-deferred in a traditional IRA or tax-free in a Roth IRA. You can invest in domestic stocks, international equities, or a combination of both to achieve geographic diversification.

When selecting individual stocks for your IRA, consider your time horizon and risk tolerance. Since IRAs are designed for long-term retirement savings, many investors focus on quality companies with strong fundamentals rather than speculative plays. Dividend-paying stocks can be particularly attractive in an IRA because the dividend income isn't taxed annually as it would be in a taxable account.

Bonds and Fixed-Income Securities

Bonds represent loans you make to governments or corporations in exchange for regular interest payments. Within an IRA, you can invest in:

  • U.S. Treasury bonds, notes, and bills
  • Corporate bonds from investment-grade to high-yield
  • Municipal bonds (though their tax advantages are redundant in a tax-advantaged account)
  • International bonds and emerging market debt
  • Treasury Inflation-Protected Securities (TIPS)

Bonds typically provide more stable, predictable returns than stocks, making them valuable for portfolio diversification and risk management. The tax-deferred nature of IRAs is particularly beneficial for bonds since interest income is taxed as ordinary income in taxable accounts.

Mutual Funds

Mutual funds pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. They're professionally managed and offer instant diversification, making them ideal for investors who want a hands-off approach. Within your IRA, you can access thousands of mutual funds spanning various asset classes, investment styles, and geographic regions.

When evaluating mutual funds for your IRA, pay attention to expense ratios, as these fees compound over time and can significantly impact your long-term returns. Many investors favor low-cost index funds that track market benchmarks rather than actively managed funds with higher fees.

Exchange-Traded Funds (ETFs)

ETFs combine features of mutual funds and individual stocks. Like mutual funds, they hold diversified portfolios, but they trade on exchanges throughout the day like stocks. ETFs typically have lower expense ratios than mutual funds and offer tax efficiency advantages, though this matters less within the already tax-advantaged IRA structure.

Popular ETF categories for IRA investors include broad market index funds, sector-specific funds, international equity funds, bond funds, and commodity funds. The flexibility and low costs of ETFs have made them increasingly popular choices for retirement accounts.

Certificates of Deposit and Money Market Accounts

For conservative investors or those nearing retirement who want to preserve capital, IRAs can hold bank products like Certificates of Deposit (CDs) and money market accounts. These FDIC-insured investments offer guaranteed returns with minimal risk, though the trade-off is typically lower growth potential compared to stocks and bonds.

IRA CDs work similarly to regular CDs but are held within your retirement account. You can ladder multiple CDs with different maturity dates to maintain liquidity while earning higher rates on longer-term deposits. Money market accounts within IRAs provide easy access to cash while earning modest interest, making them suitable for your emergency allocation or funds you're preparing to deploy into other investments.

Alternative Investments: Beyond Traditional Securities

One of the lesser-known aspects of IRAs is their ability to hold alternative investments. However, accessing these options typically requires opening a self-directed IRA with a specialized custodian, as most mainstream brokerages don't support alternative assets.

Real Estate

Real estate is one of the most popular alternative investments for self-directed IRAs. You can use IRA funds to purchase:

  • Residential rental properties
  • Commercial real estate
  • Raw land
  • Real estate investment trusts (REITs) traded on exchanges
  • Private REITs and real estate funds

When holding real estate in an IRA, strict rules apply. You cannot live in the property, use it as a vacation home, or sell it to family members. All expenses must be paid from the IRA, and all income must flow back into the IRA. You also cannot personally guarantee a mortgage on IRA-owned property, though non-recourse loans are permitted.

Real estate can provide diversification and potential inflation protection, but it also comes with unique challenges in an IRA context, including illiquidity, management responsibilities, and the risk of unrelated business income tax (UBIT) if you use debt financing.

Precious Metals

IRAs can hold certain precious metals, but not just any gold or silver will qualify. The IRS has specific purity requirements:

  • Gold must be 99.5% pure
  • Silver must be 99.9% pure
  • Platinum must be 99.95% pure
  • Palladium must be 99.95% pure

Approved forms include certain government-minted coins (like American Gold Eagles) and bullion bars from approved refiners. The metals must be held by an IRS-approved custodian or depository—you cannot store IRA-owned precious metals in your home safe.

Investors turn to precious metals IRAs for portfolio diversification and as a hedge against inflation and economic uncertainty. However, these investments don't generate income, and storage fees can eat into returns over time.

Private Equity and Venture Capital

Self-directed IRAs can invest in private companies, startups, and venture capital funds. This allows sophisticated investors to potentially capture the high returns of early-stage companies, though these investments carry substantial risk and are highly illiquid.

When investing IRA funds in private equity, you must be careful to avoid prohibited transactions. You cannot invest in your own business or in companies where you have significant personal involvement. All profits must flow back to the IRA, and you cannot receive any personal benefit from the investment beyond the growth of your retirement account.

Promissory Notes and Private Lending

Your IRA can act as a lender by purchasing promissory notes or making private loans. This strategy allows you to earn interest income within your retirement account while potentially helping others finance real estate purchases, business ventures, or other needs.

As with other alternative investments, strict rules apply. You cannot lend to yourself or certain family members (disqualified persons), and all loan terms must be commercially reasonable. The borrower must make payments directly to the IRA, and you must properly document all transactions.

Cryptocurrencies and Digital Assets

The IRS has clarified that cryptocurrencies like Bitcoin and Ethereum are treated as property for tax purposes, and they can be held in self-directed IRAs. Some specialized custodians now offer cryptocurrency IRA services, allowing investors to gain exposure to digital assets within a tax-advantaged retirement account.

Cryptocurrency investments are highly volatile and speculative, making them controversial choices for retirement savings. However, some investors allocate a small percentage of their IRA to digital assets for diversification and growth potential. Security is a major concern, so choosing a reputable custodian with robust security measures is essential.

What You Cannot Invest in Within an IRA

While IRAs offer broad investment flexibility, the IRS prohibits certain assets and transactions. Understanding these restrictions is crucial to avoid penalties and potential disqualification of your IRA.

Collectibles

The IRS specifically prohibits IRAs from investing in collectibles, which include:

  • Artwork
  • Rugs and antiques
  • Gems and jewelry (except certain coins)
  • Stamps and rare coins (with specific exceptions)
  • Alcoholic beverages
  • Most precious metals that don't meet purity standards

If your IRA purchases a collectible, the amount invested is treated as a distribution, potentially triggering taxes and penalties.

Life Insurance

You cannot hold life insurance contracts within an IRA. However, annuities are permitted and are actually quite common in IRAs, particularly for investors seeking guaranteed income in retirement.

Prohibited Transactions

Beyond specific asset restrictions, the IRS prohibits certain transactions between your IRA and "disqualified persons," which include you, your spouse, your ancestors and descendants, and certain business partners. Prohibited transactions include:

  • Selling property to your IRA
  • Lending money between you and your IRA
  • Using IRA assets for personal benefit
  • Receiving unreasonable compensation for managing IRA investments

Engaging in a prohibited transaction can result in your entire IRA being treated as distributed, creating a massive tax bill and potential penalties.

Choosing the Right Investments for Your IRA

With so many options available, how do you decide what to invest in within your IRA? Consider these factors:

Your Time Horizon

If retirement is decades away, you can typically afford to take more risk with growth-oriented investments like stocks. As you approach retirement, gradually shifting toward more conservative investments like bonds and stable value funds can help protect your accumulated wealth.

Risk Tolerance

Your personal comfort with market volatility should guide your investment choices. Aggressive investors might favor individual stocks or alternative investments, while conservative investors might prefer bond funds and CDs.

Diversification

Don't put all your eggs in one basket. A well-diversified IRA might include a mix of domestic and international stocks, bonds, and perhaps a small allocation to alternative investments. Diversification helps manage risk and can smooth out returns over time.

Costs and Fees

Investment expenses compound over time and can significantly erode your returns. Favor low-cost index funds and ETFs over expensive actively managed funds when possible. If you're considering alternative investments through a self-directed IRA, factor in the higher custodial fees these accounts typically charge.

Tax Efficiency

While all IRA investments grow tax-deferred (or tax-free in a Roth), some investments are more tax-efficient than others in taxable accounts. Consider holding tax-inefficient investments (like bonds and REITs that generate ordinary income) in your IRA, while keeping tax-efficient investments (like growth stocks) in taxable accounts if you have both.

Working with Custodians and Brokers

Your choice of IRA custodian or broker will determine which investments you can access. Traditional brokerages like Fidelity, Vanguard, and Charles Schwab offer excellent platforms for stocks, bonds, mutual funds, and ETFs, along with low fees and user-friendly tools.

If you want to invest in alternative assets, you'll need a self-directed IRA custodian that specializes in these investments. These custodians charge higher fees but provide the infrastructure necessary to hold non-traditional assets in compliance with IRS rules. Research potential custodians carefully, checking their experience, fee structures, and customer reviews.

Conclusion

IRAs offer remarkable flexibility when it comes to investment options, extending far beyond the stocks and mutual funds most people associate with retirement accounts. Whether you stick with traditional securities or venture into alternative investments like real estate and precious metals, understanding what you can invest in—and the rules governing those investments—empowers you to build a retirement portfolio aligned with your goals and values.

For most investors, a diversified portfolio of low-cost index funds and ETFs provides an excellent foundation for long-term retirement savings. However, if you have specialized knowledge or interest in alternative investments, a self-directed IRA can open doors to unique opportunities. Whatever path you choose, make sure your investment strategy aligns with your time horizon, risk tolerance, and overall financial plan. Consider consulting with a financial advisor or tax professional before making significant investment decisions, especially when dealing with alternative assets that come with complex rules and potential pitfalls.

Remember that the goal of your IRA isn't just to invest in interesting assets—it's to build sustainable wealth that will support you throughout retirement. Keep that long-term objective in mind as you evaluate your options and construct your IRA investment portfolio.