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By Laurie Bachelder Friday, May 11, 2007

The exploding IRA market is expected to hit the $5.6 trillion mark by 2011. Roughly 75 percent of baby boomers roll their 401(k) retirement funds into IRA accounts and are looking for ways to truly diversify beyond the default choice of stocks and bonds.

With uncertainty in the stock market and the breakdown of consumer confidence in corporate America, there has been an explosion in the demand for alternative investments. These days, investors prefer to have choices beyond stocks and bonds. Few people are aware that there are viable alternatives.

A growing number of people are learning that they can invest in real estate and other nontraditional assets using their IRAs. This option is ideal for individuals who do not have cash on hand to invest or who simply want to diversify their portfolios.

Nontraditional IRA investments such as real estate offer many advantages.

n Diversification: Buying real estate is one way to diversify a portfolio that primarily holds stocks, bonds and mutual funds, providing an option to the stock market.

n Tax benefits: An IRA might offer certain tax advantages, including income tax deductions for IRA contributions and deferred taxation of gains and appreciation.

n Estate planning: Assets held in IRA accounts are generally exempt from the claims of creditors. In addition, purchasing property within an IRA can give you or your client a way to pass certain assets to beneficiaries outside of probate.

n Financed investments: Investors might be able to obtain financing (nonrecourse loan) from a lender to buy real estate in an IRA, which allows them to participate in the benefits of a leveraged financial transaction.

n Income: Certain commercial and rental properties might generate positive cash flow within the IRA, and depending on the type of retirement account, that could mean the income is either tax-deferred or nontaxable.

n No 1031 exchanges: Specific investment timelines or requirements to purchase "like kind" investments when buying real estate with an IRA do not exist.

There are a few things to remember about real estate.

n Invest in what you know.

n Generally, you don't lose all principal, even in a worst-case scenario.

n For most of the 20th century, appreciation has kept pace with or exceeded inflation.

n From 1973 through 2005, real estate has outperformed the S&P 500.

Investors should not undertake investing in real estate with an IRA on their own, due to strict rules. Instead, they should enlist the help of an adviser to guide them.