What Assets Cannot Be Held in an IRA?
Individual retirement accounts (IRAs) offer many opportunities for investment, though there are certain restrictions set forth by the IRS that must be adhered to when holding assets within an IRA.
IRAs cannot invest in life insurance policies or collectibles such as artwork, stamps, rugs, antiques metals and alcoholic beverages; such investments constitute self-dealing which is prohibited transactions.
Real estate investment is one of the more popular choices for Self-Directed IRAs, but the IRS imposes certain rules to be adhered to when owning property within an IRA. Any property owned must only be used for investment purposes and cannot be rented out to yourself or family as this would constitute a prohibited transaction. Your IRA can invest in life insurance contracts but not collectibles such as artwork, stamps, rugs coins or alcohol (see DOL Advisory Opinion 2000-10A).
There are exceptions to every rule, and most custodians are experienced at handling nontraditional assets that may seem prohibited to others. But it’s still essential to know and abide by them in order to be successful with investing.
Stock in a Closely Held Company
Understanding which assets cannot be held in an IRA will allow you to avoid prohibited transactions that could incur penalties and fees, and make informed investment decisions for your retirement savings that ensure it will be adequately protected.
One of the most prevalent prohibited transactions occurs when an IRA owner engages in self-dealing. You cannot use your IRA funds for personal financial gains (e.g. buying a vacation home to rent to family) nor extend loans or receive compensation from disqualified people such as your custodian, spouse and/or lineal descendants.
Additionally, IRAs cannot invest in private companies owned by disqualified persons as that would constitute violating the exclusive benefit rule and could lead to potential sanctions from the IRS.
Life insurance contracts, collectibles (such as antiques, artwork, gems stamps and metals), commodities and futures are considered non-qualified investments that Congress does not approve of using retirement funds for personal gain during working life.
The IRS prohibits IRAs from investing in S-corp stock due to regulations prohibiting ownership of more than 50% of an entity by an IRA, including any disqualified individuals related to your IRA. Engaging in such transactions would constitute prohibited transactions which must be reversed immediately.
Disqualified parties include you, your spouse and any relative up and down the family tree. Furthermore, an IRA cannot borrow money from either of these sources as that constitutes an illegal transaction.
IRAs cannot hold collectibles such as artwork, antiques, rugs, gems stamps and coins or alcohol beverages that have high artistic or historical interest or rarity value or rarity – this includes fine arts antiques as well as certain metals.
Additionally, an IRA cannot purchase property for personal use – such as living there, vacationing there or simply spending the day there – nor buy, sell, trade or lend any assets to any disqualified people or entities.
Disqualified parties include your fiduciary, spouse, parents or children who are disqualified to deal with. Engaging in prohibited transactions may lead to serious account penalties; to minimize such risks when investing your IRA it’s wiser to only deal with non-disqualified parties as this will eliminate nearly all prohibited transaction risks.
Real estate investing is one of the most sought-after choices among IRA Innovations clients, but to do it legally and avoid violating IRS prohibited transaction rules is important. No property owned by your IRA should be used for your own personal benefit and disqualified persons (spouse, lineal ascendants and descendants) must not perform work on it.
An IRA may breach its exclusive benefit rule in several ways, including lending money directly to its own company that it manages and controls or owns a small stake in. This type of prohibited transaction generally has more room for interpretation depending on the size and nature of entity your IRA invests in.
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