Are Collectibles Allowed in an IRA?
The tax code prohibits IRAs from investing in collectible items like artwork, stamps, rugs and alcohol beverages; however, some alternative investments are permitted by the IRS.
IRAs allow investors to invest in precious metals such as gold, silver and platinum coins that meet specific purity requirements.
Metals and Coins
Metals and coins may be included as investments within an Individual Retirement Account (IRA), such as coins minted by the U.S. Treasury or one-ounce silver coins, along with gold, platinum and palladium bullion bullion.
Non-fungible tokens (NFTs), unique digital identifiers that can certify ownership of assets and rights, fall outside of IRS rules regarding collectible coins. Though NFTs do not fall into that category, their purchase with plan assets could constitute a prohibited transaction.
Purchase of rare cars through your Solo 401k may seem tempting, but doing so would incur significant taxes and penalties. When using retirement savings to purchase collectibles from any source – even through approved funds that hold it for you – is considered distribution to you in that year and income tax must be withheld along with an early distribution penalty of 10%. This rule applies regardless of who purchases them themselves or holds them as investments for them in an IRA account.
Works of Art
Artwork, antiques, rugs, stamps, gems and alcoholic beverages are considered collectible items by the IRS and cannot be held in an IRA. This may come as no surprise to most investors given these assets are often used for speculation due to their often fluctuating prices. Tracking precious metal prices is far easier than monitoring artwork or collectible values.
Retirement savers considering alternative investments often explore whether or not it is possible to indirectly invest in certain collectibles through pass-through investment funds, which may hold things such as classic cars or works of fine art. It is wise to consult a tax professional before proceeding with such plans in their self-directed IRAs.
Because if you buy certain assets with your IRA and take out distributions prior to reaching age 59 1/2, taxes and penalties may apply; this practice is known as prohibited transactions and is described in depth by the IRS in Publication 590-B.
Rugs and Antiques
Note that the IRS prohibits Self-Directed IRAs from investing in collectibles. These items include works of art, antiques, rugs and certain tangible personal property like gemstones, metals, coins stamps or alcohol beverages.
Each work of art, coin, or other object is considered non-fungible and thus unique; consequently, some tax professionals believe that non-fungible assets (NFTs) associated with digital files could fit this description.
Other experts claim that collector cars fall outside the collectibles prohibition because IRAs may invest in partnership shares holding them. Even so, such transactions still constitute prohibited transactions and could incur tax and penalties upon distribution from an account – for instance if an IRA invests in such prohibited assets then distributes them out from its account, they would incur income taxes plus an early withdrawal penalty.
Self-Directed IRAs cannot invest in certain things, including life insurance policies (with some exceptions), collectibles (art, antiques, rugs, gems and coins, stamps and alcoholic beverages) and real estate. You also cannot invest in entities owned by people considered disqualified persons for your IRA; these could include spouses and members of their immediate families as well as any businesses you own directly or indirectly.
Investing in these assets may lead to illegal transactions that will threaten your tax-free status and may require you to pay taxes and 10% early withdrawal penalties. To prevent this from happening, be very clear with what you are purchasing, making sure it meets the IRS definition of collectible, and consulting your Self-Directed IRA custodian to ensure you’re not engaging in prohibited transactions.