What Assets Cannot Be Held in an IRA?
There are certain assets which cannot be held within an Individual Retirement Account (IRA). These regulations are laid out in the Internal Revenue Code and enforced by both the IRS and Department of Labor.
Rule of thumb dictates that anyone related to an IRA who falls within its scope, including themselves and any “disqualified persons”, including spouses and lineal descendants, cannot engage in self-dealing transactions related to it.
Real Estate
Real estate investments, including leveraged real estate investments, should not present a problem for self-directed IRAs as long as their owner follows some common-sense guidelines. One key rule is to avoid transactions wherein any personal benefits accrue to you or to the IRA itself – for instance purchasing rental property and using rental income to pay down mortgage payments would violate DOL rules).
Since many traditional trustees do not provide this type of service, IRA owners must find an independent trustee who specializes in holding unusual assets within an IRA. Furthermore, collectible investments and sweat equity transactions are prohibited transactions and could jeopardize its tax-favorability status.
Stock in a Closely Held Company
Real estate and private equity investments are among the most frequently featured non-traditional assets within an IRA, although many self-directed IRA providers only permit these investments if both the owner and disqualified persons do not invest simultaneously (to prevent an unlawful transaction).
Offensive transactions include having your IRA purchase a vacation property for yourself or your family’s use. Other prohibited transactions could involve purchasing stock in a closely held company that you serve on, buying mortgages on homes owned by the IRA, and/or purchasing life insurance policies from an unrelated third party – all these potentially prohibitive activities should be avoided where possible.
Mutual Funds
Mutual funds are an increasingly popular retirement investment option. Their professional management and diversification make them attractive; however, these investments are not FDIC insured, meaning principal can be lost or value fluctuates considerably over time.
Self-dealing should be avoided by IRA owners to comply with IRC 4975, and can result in penalties. Examples include buying rental property with their IRA to use the rent income to cover mortgage payments or investing in your own private company as a means to gain control of said business.
Stock Options
The IRS places certain limits on what assets can be held within an IRA. Generally speaking, its rules prohibit investments such as artwork, stamps, rugs, automobiles and gold coins being put in your IRA account. Furthermore, any co-investments with any person that does not meet qualifying criteria would also be prohibited by these restrictions.
This rule presents a difficult conundrum since you cannot invest in your own company; however, this restriction also prevents an IRA from investing in small private firms with rapid expansion plans. To comply with this regulation and keep an IRA compliant, third-party vendors should be used when buying, selling or transferring assets.
Bonds
The IRS prohibits IRAs from loaning money directly to you or anyone in your family – including spouses – as this would constitute a prohibited transaction that could get your account into legal hot water with them.
Your IRA cannot hold collectibles such as artworks, rugs, antiques, metals, gems stamps and coins (with some exceptions) as well as alcohol (with certain exceptions). Furthermore, an IRA cannot own life insurance policies.
Some IRAs can hold Treasury Inflation-Protected Securities (TIPS), which are tax-free investments whose par value increases with inflation. They’re an attractive alternative to corporate bonds which are taxed at ordinary income rates.
Other Investments
IRAs and other retirement accounts may hold a variety of investments; however, some cannot due to prohibited transaction rules.
When investing with an IRA, the IRS takes into account both you and any disqualified persons associated with that investment. That is why many custodians do not permit investors to transact business with entities considered disqualified persons.
Life insurance and collectibles such as artwork, rugs, antiques, metals gems stamps and coins cannot be held within an IRA or retirement account.
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