What Investments Cannot Be Held In An IRA?
Saturday, February 15th 2025
Individual Retirement Accounts (IRAs) have become an indispensable component of many people’s retirement planning strategies due to the tax advantages that make IRAs such a compelling option for long-term saving. But not all investments may be held within an IRA account – most people understand what assets can be included like stocks, bonds, mutual funds, and even real estate; but few know which investments the Internal Revenue Service (IRS) does not permit within an IRA account. This post seeks to shed some light on these restrictions by offering examples.
Life Insurance
One of the main restrictions on IRA investments involves life insurance contracts. Under Section 408(a)(3) of the Internal Revenue Code, no part of an IRA’s trust funds may be invested in life insurance contracts.
The IRS prohibits life insurance being held within an IRA as they feel this could allow individuals to reap double tax advantages that come from doing so, particularly after death benefit payout. Life insurance proceeds tend not to be considered taxable income for beneficiaries at death while investments within an IRA grow tax-free until withdrawal at retirement when withdrawals must then be taxed as ordinary income. By permitting it within an IRA however, life insurance would lose any ability for tax deferment purposes, as its buildup and death benefit payout could no longer be taxed, thus defeating its primary function.
Collectibles
Individual Retirement Arrangements (IRAs) were never intended to hold collectibles; according to IRS rules, collectibles include artworks, rugs, antiques, and metal items other than certain forms of bullion (other than certain gems or stamps and coins with certain restrictions), gems stamps coins (with some exceptions), alcohol beverages, and certain tangible personal property that fall into this category.
The primary motivation for the ban lies in its difficulty in accurately valuing collectibles for tax purposes, since their true worth often depends on factors like rarity, condition, and demand – in addition to not providing regular dividend income like stocks or bonds do, making collectibles unsuitable as retirement investments.
The IRS does make exceptions for some precious metals and coins, including gold, silver, platinum, or palladium bullion that meets certain fineness standards as well as certain U.S. coins (1,2).
S-Corporations Stock
An S-Corp is a type of corporation which opts to pass its income, losses, deductions, and credits directly through to shareholders for federal income tax reporting purposes. Individuals then report these income and losses on their personal tax returns at individual income tax rates rather than double taxation of corporate profits.
However, IRS rules prohibit IRAs from owning S-Corp stock due to S-Corp’s stringent shareholder requirements – specifically that no more than 100 shareholders must meet specific criteria such as being individuals, certain trusts or estates (none can be partnerships, corporations or nonresident aliens) thus ruling them ineligible for ownership of stock in this type of corporation – something an IRA does not qualify as. Therefore, it cannot own S-Corp stocks.
General Partnerships and Limited Liability Companies
Even though IRAs can invest in various business entities, they generally cannot invest with general partnerships (GPs) or limited liability companies (LLCs) considered “Disqualified Persons,” according to IRS rules. A Disqualified Person includes any of an IRA owner’s spouse, ascendants/descendants with spouses living within his/her lineal ascendant/descendant line as well as investment advisors/managers holding 50%+ interests or any corporation where disqualified people hold over 50% ownership interest – anything that occurs between transactions could cost them tax advantages as it risks disqualified status altogether! If an IRA transacted with one, its tax advantages would become obsolete!
Even if an LLC or GP does not meet this criterion, their investment could still trigger Unrelated Business Taxable Income (UBTI). UBTI results when tax-exempt entities engage in trade or business which does not coincide with their original purpose and cause their income tax exemption status to lapse.
Derivatives and Other High-Risk Investments
Though technically legal, derivative investments such as futures contracts and options should generally be avoided within an IRA due to their inherent risks. Leveraging may magnify both gains and losses.
Attributed to their risks, derivative investments could incur IRS fines of 6% should any losses occur that exceed their annual contribution limit; hence many custodians opt not to allow derivatives as investments within IRAs they manage due to these potential issues.
Personal Real Estate
Although IRAs can invest into real estate properties, they can’t be used to purchase your home or other property that will benefit either yourself, other related parties (i.e. your spouse) or your ancestors, descendants of your lineage for personal gain It is important to ensure the money that is in the IRA is used for retirement savings.
Conclusion
While Individual Retirement Accounts provide investors with significant flexibility when it comes to diversifying their holdings, it’s critical they understand any restrictions placed upon their accounts. Prohibited transactions rules exist primarily to protect tax deferral status of retirement accounts while preventing conflicts of interest; understanding these restrictions not only safeguards that status but can help guide investments more closely aligned with long-term retirement goals.
Financial decisions can be an intricate maze. While certain doors may close to you when making investments through an IRA, other doors remain available – so be mindful of which are closed, to plan wisely for your retirement goals and avoid mistakes that would cause future difficulties. It is wise to consult a reliable advisor when making decisions for an IRA investment; doing this ensures compliance with IRS regulations as well as your retirement objectives being achieved efficiently and correctly.
Ready to add precious metals in your retirement savings plan?
An investment in gold or other precious metals can help you diversify your investment portfolio. Because gold has little or no connection to equity and bonds, it can reduce your total risk. You may invest in gold via specialized gold IRA providers, which you can read about below.
Learn more about: American Hartford Gold free silver
Learn more about: Augusta Precious Metals prices
Learn more about: Goldco
Learn more about: Advantage Gold bullion
Learn more about: Birch Gold silver coins
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Learn more about: Rosland Gold website
Learn more about: Lear Capital lawsuits
Learn more about: Patriot Gold Group scam
Learn more about: Oxford Gold review
Learn more about: Regal Assets silver coins
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2 Comments
Too bad personal real estate cannot be included in an IRA!
Hi Russel,
Indeed, although it would be one of those “too good to be true” situation.
Happy investing!