Although you may not know it, your IRA can invest in a variety of alternative investments, including partnerships. But just because it can doesn't mean it should - these investments aren't without risk. If you run afoul of numerous self-dealing and prohibited transaction restrictions that apply to tax exempt entities, the investment may cause the entire account lose its IRA status altogether. This is a disastrous result since the IRA is treated as distributing all of its assets to you in a highly taxable and penalized manner.
And even if you set it up exactly right, the IRA will most likely pay tax on the partnership income that passes through to it, which requires filing additional returns.
So it's not too surprising most financial institutions that act as custodians don't permit an IRA to invest in a partnership, even though it's technically possible. For that ability, you generally need to use a self-directed IRA.
In a recent Private Letter Ruling, a taxpayer sought to invest IRA funds in a partnership. PLR 201547010. His financial advisor prepared the paperwork, the IRA custodian issued a check payable to the partnership, and the partnership agreement showed the IRA as the partner. Done deal? Not quite. Most likely for the reasons discussed above, it turned out the IRA custodian was "unable to hold the partnership interest." So the custodian issued a Form 1099-R, treating the attempted investment as an IRA distribution.
There is a 60-day period to roll over IRA distributions to another IRA or eligible retirement account. The taxpayer, however, didn't learn about the Form 1099-R until preparing his tax returns, which was beyond the 60-day roll over period. So, he asked the IRS to waive the 60-day requirement, which it can do for equitable reasons. The taxpayer argued that his financial advisor should have prepared paperwork to move the account to a different financial institution that would have allowed the investment - presumably through a self-directed IRA.
The IRS was not sympathetic. While it noted that errors committed by a financial institution are grounds for waiving the 60-day period, it didn't view this situation as that type of an error. Instead it said, "In this instance, [the taxpayer] chose to use the proceeds from [the IRA] to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes." The taxpayer wound up paying tax and penalties on the distribution (although on a positive note he did not unwind the entire IRA, which may have happened if he actually had invested IRA funds in a partnership).
Bottom line: if an alternative investment by an IRA looks enticing, remember there are many, many ways to go wrong, and don't assume reliance on a financial advisor will get you there successfully or that the IRS will be sympathetic if you mess it up.