Can I use my IRA to buy an apartment building?

NEW YORK (CNNMoney) -- Can I purchase an apartment building as an investment with the money I have in my IRA? -- Bernie Sauer, Detroit Lakes, Minnesota

The short answer is yes, provided you open a self-directed IRA with a custodian willing to deal with alternative assets.

With erratic stock returns in recent years and stingy bond yields, many retirement investors are turning not just to real estate, but to nontraditional investments from gold bullion and hedge funds to tax liens and horses.

But just because the government lets you stuff your IRA with almost anything -- the few no-nos include life insurance and art -- doesn't mean you should.

Before pinning your retirement on any out-of-the-ordinary investment, proceed with extreme caution. For starters, you could get conned. Last fall, securities regulators issued a warning about flim-flam artists pitching owners of self-directed IRAs everything from fake commercial mortgage loans to foreign bonds that were part of a Ponzi scheme.

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One reason scamsters target IRAs is that they're a veritable honey-pot. A recent McKinsey report estimates that between 2009 and 2015, savers will roll some $1.5 trillion from 401(k)s and similar accounts into IRAs.

Regulators note that since IRAs are designed as long-term investment vehicles, owners may not be vigilant in monitoring their accounts, allowing years to pass before a worthless investment is spotted.

You should also keep in mind that unusual investments also carry unusual risks. Gene Valentini, 67, who runs a county agency in Texas, invested $50,000 in racehorses eight years ago through a self-directed IRA expecting returns of 25% or more a year.

So how did his ponies run? "Almost every horse died or retired," he says. "I get a sporadic dollar here or there, but the money is gone."

Investing in a single property may seem more straightforward, but it leaves you vulnerable to the prospects for just one neighborhood. You can mitigate that risk by owning several buildings. But unless you've got a much bigger nest egg than most -- the average IRA is worth less than $125,000 -- it would be difficult to own even a few buildings without your portfolio becoming dangerously overweighted in real estate, which generally should account for no more than 15% to 20% of your investment holdings.

11 crazy alternative investments

Finally, a variety of IRS rules can trip you up. You can buy a vacation home with your self-directed IRA, for example, but you then can't stay there or even rent it to close family members.

If you need to do a repair or renovation, you can't just fork over money from your own pocket to cover it. The funds must come from within the IRA itself. If your IRA doesn't have enough cash, you can replenish it. But you can't contribute more than the annual contribution limit ($5,000 this year, plus $1,000 if you're 50 or older).

Anything beyond that is considered an excess contribution. Run afoul of such regs, and the IRS can levy harsh penalties and, in some cases, effectively disqualify your IRA.

Bottom line: If you're set on owning real estate in your IRA, you can get much of the same benefit without the hassle by simply buying a mutual fund that invests in REITS or other real estate -- and even then you've got to be careful.

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