It is generally well-known that in an IRA account you have a wide range of investment choices. These choices are typically only limited by the custodian’s available investment options. However, there are specific prohibited transactions that cannot be accomplished with IRA funds. Often these prohibited transactions can cause your IRA to be disqualified, which can result in significant tax and penalty, along with loss of the tax-favored status of the funds.What’s Not Allowed for IRA Accounts?
- Self-Dealing. You are not allowed, within your IRA, to make investments in property which benefits you or another disqualified person. A disqualified person includes your fiduciary advisor and any member of your family, whether an ancestor, spouse, lineal descendant (child) or spouse of a lineal descendant. It is important to note that this limit applies to both present and future use of a property. So if you purchased a condo and rented it out exclusively for several years and then decided to convert it to personal use, this act would disqualify the investment and potentially classify it as a distribution, to be taxed and penalized (with interest) retroactively.
- Borrowing. You are not allowed to borrow funds from your IRA account. Likewise, you are not allowed to put up your IRA account as collateral for a loan.
- Selling. You are not allowed to personally sell property that you own outside of the IRA, to your IRA account.
- Collectibles. The single class of investments that you may not invest in with your IRA account is collectibles. This includes art, antiques, gems, coins, and alcoholic beverages, among other items. There is an exception to the coin prohibition, in that you are allowed to invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the United States Treasury Department with your IRA funds (if your custodian allows). You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
- Unreasonable Management Costs. It is prohibited to pay an exorbitant amount to an advisor to manage your account. This is due to the fact that it IS an allowed transaction to pay your advisor, tax-free, from your IRA specifically for managing the account. If the amount is deemed unreasonable (e.g., obviously for services above and beyond managing the IRA account), this transaction is prohibited. An example of this is if you have both IRA and non-IRA funds with your advisor, but you pay the advisor’s entire fee strictly from your IRA account. Unless the non-IRA funds are an inconsequential amount, the fee paid from the IRA will be deemed exorbitant to the size of the IRA account.
- (bonus!) Life Insurance. You may not purchase life insurance contracts with your IRA account funds. This is a strict prohibition.
Beyond these transactions, IRAs have a pretty wide scope of available investment options. As I indicated before, your options are mostly limited by the custodian’s available investments. In cases where the IRA funds are to be used for more unique investments, such as individual real estate transactions or gold bullion, a special custodian is often required. These transactions can be very difficult to complete and manage over time and maintain the tax-qualified status. If you’re interested in such a transaction, there is more information available in the article Where to Establish Your IRA Account.