What Investments Cannot Be Held in an IRA?
CPAs can make the process simpler for their clients by highlighting available investments such as stock, mutual funds, bonds, bank certificates of deposit, annuities, real estate or select coins.
Be mindful that an IRA cannot lend money to disqualified parties, including spouses and children of its owner as well as anyone up the family tree.
Collectibles
An IRA can hold many traditional investments, including stocks, mutual funds, bonds, bank certificates of deposit, annuities and real estate. Unfortunately, however, an IRA cannot invest in collectibles like artwork, baseball cards, rare coins or certain forms of bullion.
IRS and Department of Labor regulations forbid an IRA from engaging in any self-dealing transactions or dealings that produce unrelated business taxable income (UBTI). Failing to abide by such rules could force liquidation of the entire account, rendering its tax-exempt status obsolete.
Prohibited transactions involve any activity that provides the IRA with any direct or indirect financial gain, such as selling an IRA-owned property to disqualified people for personal gain. Your IRA also cannot lend money directly or indirectly to anyone, including yourself or yourself and company, nor invest in businesses without established markets; dealing with disqualified people (like your spouse, children, parents or lineal descendants).
Real Estate
Many IRA custodians will not allow for alternative investments like real estate or oil and gas, due to the risk of potentially illegal transactions if done improperly.
An unlawful transaction takes place when your IRA invests with certain disqualified people and receives any personal benefit directly or indirectly in return. Disqualified parties include yourself, family members and third-parties related to you; it also cannot invest in entities owned by such disqualified parties if any one or more are more than 50% owners.
To avoid prohibited transactions in real estate, only invest in properties intended purely as investments; your IRA must cover all ownership expenses and you cannot live or use the property personally. Alternatively, self-directed IRAs offer another solution, by working with an entity specializing in alternative investments who will oversee real estate related paperwork and reporting for your account.
Oil and Gas
Self-directed IRAs offer clients more flexible investment solutions, including oil and gas royalties as an intriguing avenue for retirement assets. Traditional trustees such as brokerage firms or mutual funds typically won’t act as trustees for unorthodox investments such as these; self-directed IRAs allow clients to explore these alternative routes for retirement assets.
Conceptually, energy production leasing is relatively straightforward: A property owner leases land with mineral rights to an energy producer who then pays him or her a share of oil and natural gas production on that piece of property. Companies such as ExxonMobil (XOM -0.68%), Shell, BP, Chevron and TotalEnergies or small independent producers could potentially operate.
As is the case with real estate investments, an IRA cannot reap immediate returns from these investments. Furthermore, they may only purchase property owned by disqualified persons which could include anyone in your immediate family tree (you, spouse and children). Therefore it is vital that before proceeding any consultation is sought from knowledgeable experts.
Life Insurance
IRS rules disallow life insurance contracts as investments within individual retirement accounts such as IRAs and pension plans due to an exclusivity rule which states that only an individual may benefit from an IRA-held investment.
IRA custodians also restrict investments that do not immediately provide benefits. For instance, self-directed IRAs may own real estate but the owner cannot personally use or benefit from it in any way, including receiving rental income or living there themselves.
Also, an IRA should never lend money directly to itself or other parties as this constitutes a prohibited transaction and can incur fines or even the termination of its account. Self-directed IRAs are restricted to investing only in tangible assets for which established markets exist such as stocks, mutual funds, bank certificates of deposit, annuities and select coins (half, one quarter and one tenth ounce gold, silver and palladium bullion coins) although in certain instances IRS does allow certain derivative trading such as covered call writing.
Categorised in: Blog