Last Updated on February 15, 2024 by Ben
Individual retirement accounts (IRAs) are a popular way to save for retirement. These accounts offer many tax advantages and allow individuals to save and invest for the future. However, certain assets cannot be held in an IRA due to IRS regulations. Understanding the types of assets that cannot be held in an IRA is essential for investors to ensure they follow the rules and regulations the IRS sets.
Overview of Individual Retirement Accounts
An individual retirement account (IRA) is a retirement savings account designed to help individuals save for retirement. IRAs are available in two forms: traditional and Roth IRAs. Traditional IRAs offer tax deductions for contributions, and the earnings are tax-deferred until retirement. Roth IRAs offer tax-free withdrawals at retirement but do not provide any tax deductions for contributions.
There are additional IRA types besides the two major ones, including SEP IRAs, SIMPLE IRAs, and Self-Directed IRAs. SEP IRAs are designed for self-employed individuals and small business owners; SIMPLE IRAs are designed for small businesses with fewer than 100 employees; Self-Directed IRAs allow individuals to invest in a broader range of investments than traditional or Roth IRAs.
Types of Assets That Cannot be Held in an IRA
The Internal Revenue Service (IRS) has specific restrictions on the types of assets that can be held in an IRA. These assets include life insurance contracts, collectibles, artwork, commodities and futures, S-corporation stock, and real estate investments. The IRS also restricts certain transactions that can take place within an IRA.
In addition to the assets listed above, the IRS prohibits IRA holders from investing in life insurance policies that are not considered qualified contracts. Furthermore, IRA holders cannot use their IRA funds to purchase collectibles such as coins, stamps, antiques, and gems. Lastly, IRA holders cannot use their IRA funds to buy or invest in any business or venture.
Prohibited Transactions and Self-Dealing
The IRS prohibits certain IRA transactions involving the account owner or disqualified persons. It includes transferring funds or assets to or from the IRA owner, lending money or another extension of credit between the IRA and the account owner or disqualified persons, and any other type of transaction that could be considered self-dealing. These activities are prohibited under IRS regulations and can lead to significant penalties.
In addition, the IRS also prohibits using an IRA to purchase life insurance or collectibles, such as artwork, antiques, gems, stamps, coins, and alcoholic beverages. These items are considered non-qualified investments and are not allowed in an IRA. Furthermore, the IRS does not permit IRA funds to purchase real estate for personal use, such as a vacation home or rental property.
Life Insurance Contracts
Life insurance contracts are not allowed to be held within an IRA. The IRS has determined that life insurance contracts do not meet the definition of allowable investments for IRAs. No life insurance policies may be purchased, transferred, or held in an IRA.
Additionally, the IRS forbids the holding of any annuities in IRAs. Because annuities are a form of a life insurance contract, they cannot be held in an IRA. It is because annuities are not considered qualified investments for an IRA.
Collectibles and Artwork
The IRS also prohibits the purchase of collectibles and artwork within an IRA. Collectibles include antiques, artwork, rugs, gems, coins, stamps, metals, alcoholic beverages, and other items with more excellent value than their face value. These items are not allowed to be purchased or held in an IRA.
The IRS also prohibits using IRA funds to purchase life insurance policies or invest in collectives such as partnerships or S-corporations. Additionally, IRA funds cannot be used to buy real estate or invest in a business in which the IRA owner is involved. These restrictions are in place to ensure that IRA funds are used for retirement savings and not for personal gain.
Commodities and Futures
The IRS prohibits purchasing or holding commodities or futures within an IRA. Commodities are investments such as gold, silver, grains, oil, and other commodities traded on exchanges. With the assistance of financial respective devices futures, investors can purchase or sell commodities at a predetermined price at a future date. Both commodities and futures are not permitted in an IRA.
Investors wishing to invest in commodities or futures must do so outside their IRA. Any profits or losses from these investments will be subject to capital gains taxes. Additionally, investors should be aware of the risks associated with investing in commodities and futures, as these investments can be volatile and may result in significant losses.
The IRS prohibits S-corporation stock from being held in an IRA. S-corporations are businesses elected to be taxed as a corporation rather than a partnership, and this type of ownership is not allowed in an IRA.
S-corporations are typically small businesses owned by a limited number of shareholders. They are subject to the same regulations as other corporations, but they are not subject to double taxation. Instead, the profits and losses of the business are passed through to the shareholders, who are responsible for paying taxes on their share of the profits.
Real Estate and Other Investments
The IRS also prohibits investments in real estate and other assets, such as partnerships or limited liability companies, from being held in an IRA. Investments of this type are considered too risky for an IRA and pose a risk of loss of principal.
In addition, the IRS does not allow for any borrowing or leverage when investing in an IRA. You cannot use borrowed money to purchase investments within an IRA, and it will protect the investor from taking on too much risk and potentially losing their retirement savings.
Tax Implications of Holding Prohibited Assets in an IRA
Holding prohibited assets in an IRA can have severe implications for investors. The IRS may impose penalties on investors who hold restricted assets and can issue fines for engaging in prohibited transactions. Investors should ensure they understand the rules and regulations set out by the IRS before investing.
The IRS prohibits certain types of investments in an IRA, such as life insurance, collectibles, and stocks. Additionally, the IRS prohibits certain types of transactions, such as borrowing money from the IRA or using the IRA as collateral for a loan. Violating these rules can result in the IRA being disqualified, which can lead to the entire balance of the IRA being taxed as ordinary income.