For the average investor, one of the appeals of self-directed, traditional and Roth IRAs is that they are not limited to the typical investments offered as part of employee-sponsored retirement plans. In an IRA, almost all investments are permitted, including real estate, exchange traded funds (ETFs), unit investment trusts (UITs) and annuities, along with the typical mutual funds, stocks, bonds.
Investopedia’s recent article, “5 Investments You Can't Hold In An IRA/Qualified Plan” says that while mutual funds, annuities, and company stock are typically the three primary vehicles used in qualified plans, they are allowed to hold almost any type of security. Yet, there are some limitations on the types of investments that can be held inside retirement accounts. Let’s look at them.
Life Insurance. Typically, no type of life insurance contract can be titled as an IRA or qualified plan or be held in such an account or plan. Qualified plans have one exception to this rule, known as the incidental benefit rule. It says that qualified plans can purchase a small amount of life insurance for a given plan participant. However, because the primary purpose of the plan is to provide retirement benefits, the amount of the death benefit must qualify as "incidental" compared to the plan balance.
Types of Derivative Positions. Any type of derivative trade that has unlimited or undefined risk, like naked call writing or ratio spreads, is prohibited.
Antiques/Collectibles. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry and fine wine can’t be held in these accounts.
Real Estate for Personal Use. You can hold real estate directly inside an IRA, but the IRA owner can’t benefit directly from the property in any sense, such as receiving rental income or living in the property. Therefore, you can’t purchase your house with IRA or retirement plan money. Real estate can be held in an IRA provided that the investments aren’t in your personal name. The real estate expenses and income must be paid and deposited into your IRA. The IRA also cannot purchase your primary residence or any other vacation home (providing an indirect benefit).
In addition, the IRA can’t buy or sell property already owned by you or any other disqualified person, for example, your spouse, children or their spouses, parents, grandparents and great-grandparents, grandchildren and great-grandchildren. Note that many IRA custodians can’t facilitate the direct ownership of real estate or oil and gas interests, and those that do often charge annual administration fees that are much higher than usual fees.
Most Coins. As with all other types of collectibles, most coins made of gold or any other precious metal aren’t allowed. However, there are some exceptions. Some allowed coins include American Eagle coins (proof and non-proof), American Gold Buffalo coins (non-proof), American Silver Eagle (proof and non-proof), Austrian Gold Philharmonics coins, and Canadian Maple Leaf coins. To be allowed to be held inside an IRA, the coins must be very pure in their mineral content and not seen as a collector's coin.
If you plan on venturing into exotic investment vehicles, make sure to speak with an experienced advisor regarding whether your investments are permitted to be held in your IRA/Qualified Plan to avoid costly errors and tax penalties.
Sorting out your IRA investments and properly aligning the rest of your assets is a crucial step in your retirement planning. Yet, a onetime alignment it not enough. Even once you have sorted everything out, it is important that there is continual alignment and tracking. At Family Estate Law Planning Group, this is part of our process. We work with you and other advisors in your circle to make sure there are no surprises where your assets are concerned now, in retirement, and after your passing.
For more information on our process, or to learn more about other estate planning topics, visit our website and schedule your consultation today!
Reference: Investopedia (March 31, 2018) “5 Investments You Can't Hold In An IRA/Qualified Plan”