What’s in your IRA? GAO says retirement accounts hold lots of ‘unconventional assets’

Individual retirement accounts held roughly $50 billion in “unconventional assets” in half a million accounts at the end of 2015, according to a report published Monday by the Government Accountability Office.
Real estate, private equity and hedge funds are the most commonly held unconventional-asset type in IRAs, but investors also purchased limited liability companies, limited partnerships, precious metals, promissory notes, church bonds and private placements, according to the GAO, a congressional investigative arm.
The $50 billion figure, drawn from a survey of 17 out of 26 custodians the GAO identified who allow investment in unconventional assets, is only a fraction of the approximate $7.3 trillion in IRAs.
The custodians’ data only provides a “baseline” knowledge of unconventional assets, though, because it excludes other potential investment sources such as banks, trust companies and financial services providers, according to the report. It said the likely total number of accounts invested in unconventional assets is greater than its roughly 500,000 estimate.
The overall report examines how improved guidance from the Internal Revenue Service could help IRA owners understand the risks of investing in unconventional assets.
Investing in such assets “creates some unique problems when it comes to retirement accounts especially,” such as valuation and liquidity, according to Jeffrey Levine, chief retirement strategist at Ed Slott & Co.
Due to the illiquid nature of real estate held inside an IRA, for example, there may be concerns over taking required minimum distributions from such an asset. “You can’t take out the bathroom one year, and the sink the next” to fund distributions, Mr. Levine explained.
Take another quirky wrinkle specific to real estate — if an investor buys a piece of real estate inside an IRA and rents out the property, but then fixes something on the property as trivial as a broken lightbulb, the investor will have committed a prohibited transaction, complete with tax penalties, Mr. Levine said.
“Given all the complications and potential complications that arrive, we think most people would be better off just avoiding them altogether and sticking with the more traditional things [in IRAs],” he said.