Part of the appeal of a self-directed IRA is that you can invest in a wider range of assets than a regular retirement plan. However, while these accounts give you more options, there are still limitations. Certain types of investments are not allowed under IRS rules and it’s important to understand where the lines are drawn in order to keep your account compliant.
Here are six types of assets that do not make the cut for self-directed IRA investments.
1. Collectibles
The collectibles category covers a wide range of objects, including stamps, furniture, wine, jewelry, silverware, paintings, comic books, and antiques. The IRA is meant to help Americans. Even though some collectibles do appreciate in value, they generally are not reliable enough to be considered appropriate assets for a retirement plan. And since IRAs are really meant to help Americans save for retirement effectively, the IRS excludes collectibles in order to prevent investors from making this mistake.
2. Certain types of precious metals
While you can invest in precious metals with your IRA, there are restrictions. Precious metal bars must have a purity level of at least 99% in order to be acceptable for IRA investment. The purity requirement means that most coins are considered collectibles, rather than precious metals. The IRS lists exactly which coins are acceptable and these include American Eagle Gold and Silver Coins, Canadian Gold Maples, and American Buffalo Gold Coins.
3. Term life insurance
Term life insurance doesn’t earn any income so it’s not actually an investment. Since these policies can’t provide any real financial benefit to your self-directed IRA, the IRS does not allow them. While permanent life insurance can earn income, these policies already have their own set of tax benefits (which are very similar to what you would get from an IRA).
4. Your current home
Though you can invest in other real estate properties using your IRA, you are not allowed to do so for your personal residence. The IRS considers this a conflict of interest because you would essentially be renting the property to yourself.
Besides, it makes more financial sense to keep your personal residence out of your IRA. There are a number of extra tax benefits for owning your personal residence – like deductions for mortgage interest – that you would lose by moving the property to your IRA.
However, you can buy a future residence, such as a home for retirement, with your IRA. You just have to rent the property out while you’re still working to pay off the mortgage. Only when you retire are you allowed to withdraw the property from your IRA and move in.
5. Aggressive derivative contracts
With a self-directed IRA, you can invest in some derivative contracts, like call and put options, that give you another way to manage risk and earn a higher return in the stock market. However, not all derivative contracts are allowed under self-directed IRA investment rules. You are not allowed to invest in contracts that set up a potentially unlimited downside – these are considered too risky for a retirement plan. For example, if you sell a naked call option, you agree to sell a stock at a set price, no matter how high it is actually selling for in the market. Since there is no limit to how high a stock price can go, there is no limit to how much you could lose on this trade if it goes badly.
6. Personal loans
IRS rules do allow you to make loans to certain individuals using your self-directed IRA account. These loans function just like a bank loan and include interest and a repayment schedule. However, the IRS draws the line at lending to yourself or people with whom you have a personal connection, like family members. In fact, any IRA business transactions with personal connections are prohibited.
Don’t let a prohibited investment get you in trouble with the IRS. By staying clear of the 6 investments mentioned above, you’ll be able to keep your account compliant and make the most out of IRA tax advantages.
