From time to time, someone asks if they can use their Self-Directed IRA to invest in classic or collectible automobiles and hot rods.
There’s no doubt that a well-cared for and well-maintained classic car can increase in value over time – especially if you don’t drive it! According to the Knight Frank Luxury Investment Index, returns on investments in collectible cars have dominated the collectibles universe over the past ten years. All told, for the 10 years ending December 31, 2016, collectible cars have returned 457 percent. That’s better than wine (up 267 percent over the past ten years), coins (+195 percent), Jewelry (+147 percent), art (+139 percent) and stamps (+133 percent). But if you’re going to treat cars as investments, you’re probably better off putting them outside of a Self-Directed IRA. And that’s not just true of classic cars, but of anything the IRS deems to be a collectible.
Collectibles as a prohibited transaction in Self-Directed IRAs
While the Self-Directed IRA has tremendous flexibility and allows investors to select from a nearly infinite array of potential investments, there are a few things you cannot do within a Self-Directed IRA:
- You cannot invest Self-Directed IRA dollars in life insurance policies.
- You cannot invest in gems or jewelry.
- You cannot invest in alcoholic beverages.
- You cannot invest in precious metals except for certain types of coins and bullion of sufficient and established purity.
- You cannot invest in collectibles.
Penalties for violating these prohibited transaction rules are severe: If you invest your Self-Directed IRA in any of these prohibited transactions, then the IRS may strip your account of its tax-advantaged status. That means you will be assessed income tax on your entire IRA, or, in the case of a Roth IRA, you will face income taxes on the growth, plus a 10 percent penalty for early withdrawal, if applicable. This is in addition to any state taxes that may apply.
There are also rules against taking physical possession of assets held in your IRA, or used for your benefit, other than to generate long-term wealth for your own retirement security. For example, you can own as many investment rental properties as you like – but if you stay overnight in the house just once, and the IRS finds out, they will disallow your entire Self-Directed IRA and force you to take a distribution for the entire value of the account.
The same rules generally apply to other types of self-directed retirement accounts, such as 401(k)s, SEPs and SIMPLE IRAs.
We are aware of some businesses that promote the purchase of collectible cars via a partnership structure. This is fine outside of the IRA, but inside the IRA it’s still a risky strategy, as the law prohibits investors from investing in collectibles in Self-Directed IRAs whether directly or indirectly.
There have been a number of individuals who have invested Self-Directed IRA assets in car dealerships/car sales businesses that are closely held, but in these cases, the cars were treated more like inventory than collectibles. Owning shares in a closely held LLC or C corporation that sells classic or collectible cars might fall in a grey area – but it’s probably a good idea not to be the test case for that legislation.
American IRA, LLC is one of America’s leading providers of administrative services when it comes to Self-Directed IRAs and other kinds of retirement accounts. If you are interested in learning more about self-directed retirement investing, and declaring your independence from Wall Street, call us today at 866-7500-IRA(472), or visit our website at www.americanira.com.