It is generally well-known that in an IRA account you have a wide range of investment choices, typically only limited by the custodian’s available investment choices. There are, though, specific investing activities that are prohibited with IRA funds.
What’s Not Allowed for IRA Accounts?
- Self-Dealing. You are not allowed to make investments in property which benefits you or another disqualified person. A disqualified person includes your fiduciary advisor and any member of your family, whether an ancester, spouse, lineal decendant (child) or spouse of a lineal decendent. It is important to note that this limit applies to both present and future use of a property – so if you purchased a condo and rented it out exclusively for several years and then decided to convert it to personal use, this act would disqualify the investment and potentially classify it as a distribution, to be taxed and penalized (with interest) retroactively.
- Borrowing. You are not allowed to borrow funds from your IRA account. Likewise, you are not allowed to put up your IRA account as collateral for a loan.
- Selling. You are not allowed to personally sell property to your IRA account.
- Collectibles. The single class of investments that you may not invest in from your IRA account is collectibles. This includes art, antiques, gems, coins, and alcoholic beverages, among other items. There is an exception to the coin prohibition, in that you are allowed to invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department with your IRA funds. You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
- Unreasonable Management Costs. It is prohibited to pay an exorbitant amount to an advisor to manage your account. This is due to the fact that it IS an allowed transaction to pay your advisor, tax-free, from your IRA specifically for managing the account. If the amount is deemed unreasonable (e.g., obviously for services above and beyond managing the IRA account), this transaction is prohibited.
- (bonus!) Life Insurance. You may not purchase life insurance contracts with your IRA account funds.
Beyond these transactions, IRAs have a pretty wide scope of available investment options, as I indicated before, mostly limited by the custodian’s available investments. In cases where the IRA funds are to be used for more complex investments, such as individual real estate transactions, a special custodian is often required, as these transactions can be very difficult to complete and manage over time and maintain the tax-qualified status. If you’re interested in such a transaction, let me know and I’ll be happy to put you in touch with such a custodian.