What Investments are Prohibited in an IRA?

October 19, 2021

For millions of working Americans, a traditional or Roth IRA account is the answer for their retirement savings. These accounts offer more freedom than employer-sponsored retirement plans, such as a 401(k) or 403(b), and are more flexible than defined benefit plans like a pension. If you’re looking to plan for your financial future, opening an IRA can help you achieve just that.

IRAs allow you to invest in stocks, bonds, annuities, mutual funds, exchange-traded funds, and more. Qualified plans can also hold other types of security including annuities, company stock, and mutual funds. All of these come with the tax benefits that IRAs are known for.

However, while IRAs permit a wide variety of investments there are some limitations to be aware of.

Real estate for personal use

Yes, you can hold real estate inside an IRA. The caveat is that the IRA owner can’t benefit directly from the property. For example, the property can’t be used as a primary (or secondary) residence. It also can’t be used to collect rental income. Real estate also can’t be owned by a disqualified person, such as your parents, spouse, children, grandparents, grandchildren, etc.

If you want to hold real estate in your IRA, be sure that the investments aren’t in your name. Any real estate income and/or expenses must be deposited into your IRA.

Derivative positions

Any kind of derivative trade that has undefined or unlimited risk, such as ratio spreads or naked call writing, is prohibited. Many IRA custodians prohibit the use of any kind of derivative trading with the exception of covered call writing.

Derivative trades aren’t allowed because the sole purpose of IRAs is to provide retirement security. Using speculative instruments like derivatives isn’t allowed.

If you want to trade futures or options inside of your IRA, shop around for a less restrictive custodian. There are several that allow alternative investments. Just be aware that most custodians, such as brokerages and major banks don’t allow such freedom.

Antiques and collectibles

Unfortunately, alternative investments like arts, collectibles and antiques won’t find a home in your IRA either. And the list of prohibited items in this class is long, including:

  • Physical Art
  • Wine
  • Jewelry and gems
  • Furniture
  • Stamps
  • Sports cards
  • Antique silverware
  • And more

Certain coins

Like other kinds of collectibles, most coins, such as those made of gold or any precious metal, aren’t allowed inside of an IRA plan. However, there are some exceptions to this rule, including:

  • Non-proof American Gold Buffalo coins
  • Proof and non-proof American Eagle coins
  • Proof and non-proof American Silver Eagle
  • Austrian Gold Philharmonics coins
  • Canadian Maple Leaf coins

To hold these coins inside of an IRA, they must be pure in their mineral content. They also cannot be seen as a collector’s coin. Because old Double Eagle gold coins and Krugerrands don’t meet these criteria, they aren’t allowed.

Life insurance

Generally, no type of life insurance can be housed in an IRA, SEP, or SIMPLE plan. This includes all types of life insurance, including universal, term, and variable policies. In qualified plans, there is one exception to this rule. The incidental benefit rule requires that qualified plans allow for the purchase of a small amount of life insurance for the plan participant.

Because the purpose of the plan is for retirement benefits, the death benefit amount must qualify as “incidental” in comparison to the plan balance.

Foreign investments

IRA owners must restrict their investments to the continental United States, with the exception of domestically sponsored mutual funds that make overseas investments and American Depository Receipts.

Prohibited investments vs. prohibited transactions in an IRA

Many people confuse prohibited investments with prohibited transactions. However, the two are quite different. Prohibited investments are assets that you cannot invest using IRA funds. Prohibited transactions are actions that you cannot take using your IRA or its assets.

Just as it pays to be aware of prohibited investments, it also helps to know which transactions aren’t allowed. The good news is that prohibited transactions are rare, due to the fact that a large majority of IRA assets are invested into publicly traded securities. However, there are some things to be aware of.

A prohibited transaction is the improper use of IRA assets by the IRA owner, beneficiaries, or a disqualified person. A disqualified person includes:

  • Family members (including spouse, ancestor, or any lineal descendant)
  • Anyone with discretionary control over your IRA assets
  • A fiduciary for the IRA
  • Anyone who provides fee-based investment advice for your IRA assets
  • Anyone with responsibility for administering your IRA

As an IRA owner, you aren’t allowed to borrow money from it. Other common prohibited transactions include buying property for personal use, selling property to the plan, and using your IRA as collateral for a loan.

As with any retirement plan or investment account, there are some restrictions in place that guide how you can and cannot use the account. And while there are several investments that can’t be held inside of an IRA, there’s a vast assortment of investments that are allowed. Because plans differ, it’s best to consult with a financial or retirement advisor so that you understand which investments are impermissible in your specific IRA.

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