Individual Retirement Account - Valid Investments

Valid Investments

Once money is inside an IRA, the IRA owner can direct the custodian to use the cash to purchase most types of securities, and some non security financial instruments. Some assets cannot be held in an IRA such as collectibles (e.g., art, baseball cards, and rare coins) and life insurance. Some assets are allowed, subject to certain restrictions by custodians themselves. For example an IRA cannot own real estate if the IRA owner receives or provides any immediate gain from/to this real estate investment. Examples of such gain would be the use of the property as the owner's personal residence or the benefit paid to an owner as property manager in the form of personal compensation for this service. The IRS specifically states that custodians may impose their own policies above the rules imposed by the IRS. It should also be noted that custodians cannot provide advice.

Many IRA custodians limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds, and do not permit real estate in an IRA unless the real estate is held indirectly via a security such as a real estate investment trust (REIT). Self-directed IRA custodians/administrators can allow real estate and other non-traditional assets. For example, some options brokers allow their IRA accounts to hold stock options, which are derivatives, not securities. They typically charge fees based on asset values. There are certain special restrictions on real estate held in an IRA (the IRA owner cannot benefit from the property in any way, i.e. he or she cannot use it). Self Directed IRA's allowing non security investments are more complicated.

While certain types of investments are prohibited in an IRA, real estate is not one of them. As a result, real estate owned by an IRA can generate rental income and gain on a sale which escapes immediate taxation. However, the IRA does not get (or, need) the related deductions (e.g., depreciation, mortgage interest, property taxes, etc.).

An IRA may borrow money but any such loan must not be personally guaranteed by the owner of the IRA, and also the loan must be secured solely by assets in the IRA (in other words, a non-recourse loan). Also, the owner of the IRA may not pledge the IRA as security against a debt.

Even if a particular investment is permitted to be held in an IRA, care should be taken to optimize the location of the investment in a taxable account, a traditional IRA or a Roth IRA. For example, interest on municipal bonds is generally not taxable; it is thus generally not optimal to hold municipal bonds in an IRA.