What Assets Cannot Be Held in an IRA?
Individual retirement accounts provide protection from lawsuits and bankruptcy proceedings, but it’s essential to know which assets cannot be included in an IRA.
IRAs cannot engage in prohibited transactions with disqualified individuals, including both you and your spouse.
Additionally, IRAs are prohibited from investing in life insurance contracts. Collectibles like artwork, rugs and antiques; metals (except gold, silver and platinum bullion); gems; stamps and alcoholic beverages are all restricted from investment by an IRA.
Precious metals are rare and valuable commodities that are regularly traded on global commodity markets. They make for an excellent way to diversify an investment portfolio while protecting against inflation.
The IRS allows individual retirement accounts (IRAs) to hold precious metals, including gold, silver and platinum coins and bullion that meet purity standards. They may also purchase shares of exchange-traded funds (ETFs) that track specific precious metals or funds that invest in mining stocks.
There are various costs associated with investing in physical precious metals that investors must take into account, including transaction fees, shipping, storage and insurance costs. Furthermore, disqualified persons rules can present problems when investing in alternative assets using self-directed IRAs or solo 401(ks. The penalties for breaking IRS prohibited transaction rules could be severe.
IRS rules govern the purchase of life insurance policies within an IRA, though their level of regulation and supervision does not compare to financial instruments. As always, it’s wise to consult a professional before purchasing life insurance with your retirement account.
As part of your estate plan, life insurance can also serve as an irrevocable life insurance trust (ILIT). An ILIT will allow the policy to remain tax-free when passing away and provide your beneficiaries with tax-free death benefits. Plus, premiums paid from an IRA account will not count towards income taxes!
IRA and retirement account rules are complicated and confusing, yet their logic can be understood. There are specific individuals, known as disqualified persons, whom the IRS prohibits your IRA from engaging with. Any violation could jeopardize its tax-free status and incur penalties on you.
Real estate offers significant potential as an IRA investment vehicle, but investors must remain mindful of specific IRS rules that must not be broken. You cannot self-deal in real estate transactions; buy or sell from disqualified persons (which includes you, your spouse, lineal ascendants and descendants and their spouses); live in the property; provide improvements via sweat equity improvements. Any violation would constitute distributions subject to taxes and penalties from the IRS.
Rental properties can be invested in an IRA if they can avoid potential pitfalls, offering similar returns as stocks and bonds. But you will need to prepare to cover expenses through your IRA rather than yourself; additionally, working with a custodian that allows self-directed IRA accounts may allow for using personal funds instead of borrowed ones in making investments; furthermore you must ensure there’s sufficient cash saved up so as to cover major repair bills when your property requires maintenance.
If you want to use your IRA to invest in non-traditional assets like real estate, precious metals, or startup businesses, an independent trustee may help facilitate those investments. Banks, brokerage houses, and mutual funds typically do not provide this service; alternative assets can often be acquired via exchanges that work with self-directed IRA custodians.
CPAs should be aware of the opportunities presented by investing in alternative assets within an Individual Retirement Account (IRA). Although both the IRS and Department of Labor provide limited guidance for IRA investments, there are resources they can turn to for information regarding potential investment opportunities in alternative assets. They should also familiarize themselves with prohibited transactions and self-dealing rules as well as be ready to verify promoter information provided within their accounts such as checking prices/asset values in account statements or getting valuations from independent professionals or experts – otherwise penalties for violating IRA rules could be severe!