What Assets Cannot Be Held in an IRA?
Understanding what can’t be held in an IRA and why can help ensure you avoid any prohibited transactions. Your IRA cannot engage in transactions which provide personal benefits;
Prohibited transactions encompass any arrangement that involves working with disqualified individuals; purchasing investments forbidden by the IRS; and investing in foreign assets.
IRAs do not permit investments in collectibles such as artwork, rugs, antiques, metals, gems, stamps and coins. Furthermore, certain forms of life insurance policies such as whole life, universal term policies and variable policies cannot be purchased with an IRA.
IRS and DOL rules detail prohibited transactions. Of particular note is self-dealing – using your IRA to directly benefit yourself in ways such as renting property to yourself, purchasing and living in it yourself, using it to invest in business ventures with personal gain benefits or lending money from it to someone disqualified for an IRA account.
One exception to this rule is buying life insurance on yourself – which does not count as an illegal transaction – provided the IRA only pays for premiums without directly benefitting from your investment.
Real estate investments can make an excellent addition to a self-directed IRA’s investment portfolio, provided that each property purchased meets all legal criteria and that no prohibited transactions take place that could compromise it.
Make sure that the property you own is solely used for investment, and off limits to you personally. Furthermore, never live or rent it back out to yourself or family as this constitutes self-dealing and is prohibited by the IRS. Furthermore, never lend money from an IRA account directly or indirectly to any disqualified persons (e.g. extended family and spouse). These transactions could constitute self-dealing according to the IRS and result in costly penalties if done improperly.
Oil and gas
An Individual Retirement Account (IRA) is generally forbidden from investing in oil and gas investments; however, an exception exists via Swanson case law.
This legal precedent permits an IRA to buy and operate an entire business, such as a pizza parlor or gas station. However, any services or benefits provided to any related individuals (spouse, children, parents, grandparents and lineal descendents of an IRA owner are all disqualified persons) cannot benefit personally from running it as well as to any associated employees of such an establishment.
Additionally, it’s essential to remember that loans from an IRA cannot be given directly to yourself; this would violate tax code regulations. Borrowing from unrelated parties who aren’t disqualified persons under DOL Advisory Opinion 2000-10A allows some flexibility for self-directed IRA owners. Furthermore, an IRA allows investors to invest in almost all asset classes except collectibles and life insurance.
Law does not permit Individual Retirement Accounts (IRAs) to invest in cash-value life insurance policies, nor may an IRA lend money directly to themselves or disqualified people (typically family). Furthermore, an IRA cannot buy and use property as its primary residence or office; pledge assets as security for loans; provide goods or services to an IRA or pension plan; lend funds directly or receive loans from one; invest foreign assets except publicly-traded stocks, mutual funds and limited partnership or LLC interests that include real estate investments as well as venture capital firms that manufacture or provide goods or services.
These restrictions exist to prevent you from reaping personal gain through transactions made within an IRA or pension fund, contrary to Congress’ intent. Anyone not following these regulations or seeking more benefit than was intended from their IRA could incur penalties and taxes as a result of engaging in prohibited transactions.
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