When you hear the word “prohibition,” you likely think of the 20’s and early 30’s and the ban on alcohol. But there are other prohibited actions that you’ll want to know about if you’re going to enjoy your fill of a topped-up retirement nest egg when it comes time to finish working. These prohibited investments are particularly important for Self-Directed IRA owners who know there are lots of ways to invest and build wealth—but aren’t sure where the limits are.
Self-Directed IRA: Prohibited Assets
We’ll start with the prohibitions on the assets you’re not allowed to hold within a Self-Directed IRA:
- Collectibles, including jewelry, rugs, antiques, stamps, and the like. Alcoholic beverages like expensive bottles of wine are also in this category. As much as you might like these things personally, you can’t hold them in a retirement account.
- Derivative positions. Though this isn’t the concern for the average investor, financial types who might hold derivative positions will find that no one is allowed to hold them within an IRA.
- Life insurance. Putting away retirement money into life insurance tends to mean you’re replacing a retirement strategy by betting it all on the insurance—which usually isn’t a good idea to begin with. If you ask us, this is a good example of the government making a wise decision on your behalf.
- Some coins. Precious metals are allowed, but not all collectible coins will be allowed in your IRA.
- Personal real estate. Real estate for personal use is banned, which means that you can’t stay in the real estate you own through an IRA. You can collect rent on it, hire a property manager, etc.—but you can’t hope to live there. Don’t even think of it as a “backup home.”
- Tangible personal property. The IRS lists a few “certain other tangible personal” property on its list of collectibles. Although you can own tangible assets like real estate and precious metals within an IRA, those are the exceptions to the rule of thumb that if you can store it in your basement wine cellar, it’s probably not allowable within your IRA.
While it’s important to know the asset types, for most investors, these aren’t even considerations. What you’ll really want to know are the limitations on the strategies you use with a Self-Directed IRA.
Prohibited Strategies and Transactions
What can’t you do with an IRA? Here are a few of the strategies that are banned:
- Living in your real estate. As mentioned above, you can’t hold a house in an IRA and live in it.
- Personal use. Generally, you can’t use your IRA for personal benefits, including benefitting those around you, such as a member of your immediate family like a spouse. That includes real estate, but also includes transactions such as selling certain assets from an IRA to someone to whom you’re not allowed to deal with through this tax-advantaged account.
- Selling to yourself. Needless to say, if you can’t sell to your spouse, you certainly can’t sell to yourself!
As a general rule of thumb, it’s important to keep your IRA separate from the immediate personal benefit of you or your family. Although it might seem like you’re doing a nice and generous thing, these prohibited transactions can actually lead to far more headaches than they’re worth.
For more information, visit the IRS website on prohibited transactions.
While there are plenty of Self-Directed IRA limitations, remember that these accounts also provide you with lots of freedom and opportunity for growth. Learn more by calling 866-7500-IRA or continuing to read www.AmericanIRA.com.