What Assets Cannot Be Held in an IRA?
An Individual Retirement Account (IRA) or qualified retirement plan allows for almost every investment type; however, there may be certain exceptions that cannot be held within an IRA or plan.
Most common prohibited transactions involve buying assets where you or other disqualified parties receive personal gain from the transaction, such as renting property with rental income accruing directly to them.
1. Real Estate
One common misperception among retirement investors is that non-traditional assets like real estate and private equity cannot be included within an IRA or pension plan, yet this is false; you can indeed utilize such vehicles provided they are properly structured.
Avoiding prohibited transactions is key; that means no members of your immediate or extended family – such as spouses, children and grandchildren – can derive direct or indirect benefit from them.
One way to avoid prohibited transactions with your IRA funds is to make sure any property purchased with these funds is titled in its name rather than yours and use debt financing instead of cash as financing options; using this strategy eliminates 99.9% of potential prohibited transactions.
2. Stocks
Stocks tend to offer the greatest long-term returns but also pose the highest risks. You can either invest directly in individual stocks or use mutual funds or exchange-traded funds (ETFs) as diversifiers and reduce risks.
Self-directed IRAs allow investors to invest in many assets; however, certain investments may be prohibited by IRS regulations and breaching these could revoke your tax-exempt status and generate taxes and penalties upon distribution.
For instance, IRAs do not permit the holding of collectibles such as artwork, stamps, rugs and certain metals; however, you can purchase privately held company shares as long as their valuation requirements have been fulfilled; coins minted by the Treasury Department as well as precious metal bullion meeting commodity market standards can also be included in your IRA account.
3. Bonds
Bond investments such as corporate, municipal and Treasury bonds offer IRA investors attractive yields while being low risk investments. Plus, deferred income taxes help reduce near-term tax liability as you invest.
However, both the IRS and Department of Labor remain vigilant regarding any prohibited transactions that arise when investing in nontraditional assets such as real estate, private equity and collectibles. They review each circumstance closely to ensure you do not break rules regarding self-dealing or engage in any unauthorized transaction.
Your IRA cannot purchase property owned by anyone considered disqualified, such as relatives throughout your family tree. Furthermore, lending money directly to yourself or your business without receiving some personal benefit in return is also prohibited.
4. Mutual Funds
IRAs cannot typically invest in collectibles or lend to individuals considered disqualified persons – such as anyone in your family (including yourself). Furthermore, an IRA is typically not permitted to buy or lend property or assets to an entity considered an S-corp or LLC.
This can be beneficial as it protects IRA owners from paying taxes on prohibited transactions they engage in; however, its complex rules can lead to administrative headaches for self-directed IRA custodians. As mutual funds offer a simple yet professional management solution for diversification purposes and faster earnings realization than investing directly in assets like real estate or promissory notes, careful consideration should be given as to their role within your retirement portfolio.
5. Other Investments
As long as no personal gain results from investing, IRA owners can legally invest their accounts in nontraditional assets like real estate and private equity – although many traditional custodians may restrict these asset classes from ownership.
An IRA must avoid self-dealing when investing. This means it cannot lend money directly to itself or purchase or rent real property from someone related to its owner – including all family members as well as fiduciaries like its custodian.
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