What Investments Cannot Be Held in an IRA?

What investments cannot be held in an IRA

IRA owners enjoy considerable investment freedom unless they commit prohibited transactions that jeopardize their IRA’s tax-exempt status and incur penalty fees.

CPAs must understand these rules to offer clients sound advice. CPAs must keep in mind the following investments cannot be held within an IRA: life insurance policies, collectibles, real estate investments or certain coins.

Life Insurance

IRS rules restrict an IRA from investing in life insurance policies to minimize risks or avoid early withdrawal penalties, and cannot invest in collectibles such as artwork, antiques or precious metals that don’t meet certain purity standards – even though self-directed IRA custodians often provide these nontraditional investments; be mindful of potential fraud with these investments classes.

Swanson v. Commissioner (106 Tax Court 76) established that an IRA may purchase and operate businesses to generate returns for itself, such as owning pizza parlors, gas stations, Internet websites and cattle businesses. An IRA can invest in startups provided they do not contain owners that are disqualified persons or related to its owner (according to DOL Advisory Opinion 2000-10A). Investing in “S” corporations however is prohibited as doing so allows an IRA to become both an investor and shareholder of such enterprises.

Collectibles

Traditional assets like stocks and mutual funds are simple for an IRA investor to understand; however, when it comes to alternative asset classes like real estate or private equity investments things quickly become much more complicated.

One of the primary risks in investing non-traditional assets lies in avoiding any illegal transactions. For example, investing in physical gold bars or cryptocurrency such as Bitcoin could mean incurring storage, insurance or maintenance fees that eat away at your returns quickly.

Alternative assets present a number of unique challenges when it comes to selling them when necessary, particularly collectibles and real estate that may be more difficult or impossible to sell on short notice. It’s vital that your self-directed IRA custodian offers services for these investments as well as working with dealers that provide multiple sales options for these investments.

Real Estate

Real estate may seem like an appealing investment option for your IRA, but it can be complex and costly. First of all, the IRS does not permit IRA-owned property to be lived or vacationed on. Furthermore, your IRA is often required to cover ownership expenses like property taxes, management fees and insurance premiums – with few lenders willing to offer mortgage loans specifically tailored to this type of real estate purchase.

Engaging in prohibited transactions (such as selling, lending or providing personal benefits for personal gain) could incur steep tax penalties against your IRA. There are ways around this, however; such as using a self-directed IRA custodian who specializes in more options like residential/commercial real estate/mortgage notes/international property/land investments to help meet your financial goals more quickly.

Oil and Gas

Before, investing in oil and gas through an IRA was more challenging. Today, you can add tangible domestic energy assets such as oil and gas royalties to your self-directed IRA for greater diversification of investments in retirement accounts. Of course, as always, extreme due diligence should be exercised before investing any amount of money in any type of asset in your IRA.

Your IRA can invest in mineral rights and lease them to energy production companies for future royalties, diversifying your energy portfolio while taking advantage of rising oil prices.

Avoiding prohibited transactions with oil and gas investments is generally straightforward. Your IRA cannot co-invest with disqualified persons or third parties (such as entities), nor must it comply with DOL regulations for subchapter S corporations – these limitations tend not to pose significant hurdles to investors in oil and gas investments.


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