Ever wonder why a retirement account looks like it does? For most people, a retirement account is a simple selection of stock and bond funds—predetermined by the broker—and little else. But for people who Self-Direct, there are more options available. That includes precious metals, real estate, tax liens, private companies, promissory notes, and more. In fact, when many people hear about the freedom they can enjoy with a Self-Directed IRA, they tend to wonder what the limits are.
In fact, the IRS establishes specific limits on what investors cannot invest in. And one of the chief items on that list is any sort of collectible: baseball cards, alcoholic beverages, even artwork. But why? Isn’t art a legitimate investment? Can’t someone treat baseball cards like a stock, buying low and selling high?
Here is what you will need to know if you want to understand why investors cannot buy collectibles with a Self-Directed IRA:
The Purpose Behind an IRA
In its simplest form, an IRA is there to encourage investors to put aside money for retirement. One of the best ways for Congress to do this was to create accounts that offer tax incentives for doing so. For example, with a Self-Directed Traditional IRA, an investor can put aside before-tax money in a retirement account. This creates the possibility of tax-deductible contributions. An investor can reduce their overall tax liability if they are putting money aside toward that kind of retirement account. Meanwhile, within the account itself, the growth is not taxed until the investor draws it out of the account.
This creates a powerful incentive for investors, because it means that people who are earning a lot of money and anticipate having less money during retirement can use a retirement account in beneficial, legal ways. This is part of the incentive built into retirement investing.
But where does self-direction come in?
Self-Directing An IRA
A Self-Directed IRA is one that people use to obtain the full options they have available to them. You do not have to invest in a tax lien, for example, with a Self-Directed IRA; that option is simply present. However, many people choose to self-direct because they believe that they would like a more diverse retirement portfolio. Or they might have access to unique investments, such as private stock, and it makes sense to put those within an IRA. Or investors may have specific experience with investing in one asset, such as real estate, and choose to leverage that experience with retirement money.
With that in mind, why not buy collectibles? Simply put, collectibles are difficult to monitor and track. While it is possible to have a piece of real estate assessed and its value written down, who is to say what a piece of art is worth? And for that reason, it makes sense to exempt collectibles where the only true value is what someone else is willing to pay for it.
This may sound like it applies to other assets as well, but it is easier to track the prices of assets like precious metals, given market rates. With collectibles, that is not as easy.
When you work with a Self-Directed IRA administration firm, they can help you with the paperwork that goes into administering a Self-Directed IRA. And in working alongside with them you will learn why it is so important to be able to track everything that is present within an IRA.