What Assets Cannot Be Held in an IRA?
Self-directed IRA investors often face difficulties navigating the regulations regarding what can and cannot be held in an IRA, with particular difficulty when investing in alternative asset classes that fall under IRS prohibited transactions rules.
An incorrect decision could put your retirement account in jeopardy; here is what you should know.
Life Insurance
Congress intended that IRA assets should provide inflation-protected returns; life insurance does not fit this mandate. Furthermore, life insurance sales commissions can lead to unsuitable investment decisions.
General permitted investments include real estate (with certain special rules), startup equity through crowdfunding platforms and select coins, including gold, silver and palladium coins that meet certain purity standards. Nontraditional investments must be acquired on an exchange that works with self-directed IRA custodians.
Investors in self-directed IRAs and Solo 401(k) plans should take care to avoid violating prohibited transaction rules. Investors should frequently verify the prices and asset values contained in their statements with an independent third-party professional, market expert, etc. They should also ensure their self-directed IRA custodian is legitimate; while the IRS provides a list of approved custodians; fraudsters may attempt to pass themselves off as legitimate custodians.
Collectibles
Collectibles like artwork, rugs, antiques, metals, gems, stamps and coins typically aren’t permitted in an Individual Retirement Account (IRA). However, highly refined gold and certain US and foreign coins may still be held within it so long as they remain physically in possession of the custodian of an IRA account.
The law discourages investments in collectibles due to IRS assumptions that any direct or indirect benefits obtained by disqualified people (such as sweat equity or an informal quid-pro-quo agreement) from such investments violate the prohibited transaction rules, potentially making withdrawal taxable or subjecting it to an early withdrawal penalty of 10%.
Congress has placed strict restrictions on certain investments held within an IRA account, but not with other asset classes. Because of this gap in regulation, investors have found themselves in trouble with the IRS due to violating prohibited transaction rules.
Real Estate
As opposed to banks, brokerage houses, and mutual fund industries, Congress and the IRS don’t pay as much attention when setting real estate investment guidelines. Real estate, especially leveraged real estate investment is considered high risk by Congress and IRS; any prohibited transactions could cause your IRA to lose its tax-exempt status and result in income tax liability and penalties for its tax-exempt status loss.
Self-directed IRAs allow clients to invest nontraditional investments, including startup equity on crowdfunding platforms, private company ownership interests, and cryptocurrency. It is essential to understand all of the rules, as any violation could have serious repercussions – even losing tax-exempt status for your account! For advice regarding investments made with an IRA account it is wise to seek guidance from an expert CPA as this account cannot be used for personal gain or benefit.
Mutual Funds
The IRS imposes rules, known as prohibited transactions, on IRAs and other retirement accounts to prevent individuals from engaging in activities which would benefit themselves or another in any way; such actions include tax avoidance schemes, unwritten quid-pro-quo arrangements or self-dealing activities. Traditional IRAs don’t allow access to alternative assets such as real estate, precious metals or startups due to these restrictions; however many self-directed IRA custodians allow access provided other IRS rules are being upheld.
Most rules are relatively easy to abide by, such as not purchasing property you use personally, renting out property owned by your IRA and lending it out, or lending money directly into it. The tricky parts come into play when dealing with disqualified persons – including you and family members or fiduciaries such as an IRA custodian. If any violations occur involving prohibited transactions rules, however, your IRA could lose its tax-free status and become subject to income taxes.
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