By Dr. James M. Dahle, WCI Founder
With an explosion in interest in alternative investments (for better or worse), it seemed worthwhile to lay out the actual rules with regard to what you can and cannot do with an IRA. As you dive into this world, you will discover that many retirement plan providers, whether those plans are 401(k)s or IRAs, have significant additional limitations above and beyond what the IRS actually allows. This is often to reduce their hassle, reduce their costs, and earn them more money.
For example, if you go to a bank and open an IRA, you may only be allowed to invest in its crummy, overpriced actively managed funds in that IRA. Many 401(k)s won’t allow you to make Roth contributions or Mega Backdoor Roth IRA contributions or accept IRA rollovers even though the IRS allows it.
So if you want to invest in something or do something unique with an IRA, your first step should be to see whether your desired action/investment is actually prohibited by the IRS, and if not, look around until you find an IRA provider willing to let you do it. Naturally, many of these sorts of things probably shouldn’t be done in the first place, especially if the additional costs of doing so are particularly high. And often, it is simply just easier to do them using a taxable investing account.
But if all or most of your money is in retirement accounts, it may be worth it to try to invest in these alternative investments using retirement money.
We’re going to go through two lists today—a list of prohibited investments and a list of prohibited transactions.
Investments Prohibited in an IRA
These are investments that cannot be purchased by an IRA.
#1 Life Insurance
You cannot put life insurance in an IRA. You can, however, put it in a 401(k) if the amount is “an incidental amount.” Basically, the premium can’t be more than 50% of the annual employer contribution for a whole life policy or 25% if it is a universal or variable life policy.
Collectibles are also specifically disallowed. This includes art, antiques, furniture, porcelain, alcohol (wine), stamps, baseball cards, comic books, Beanie Babies, and similar investments.
As a general rule, you cannot own physical gold coins in an IRA. There are exceptions to this, though. Basically, the idea is if the coin is very pure in quality and not considered a collector’s coin, you can invest in it. So American Eagle coins …….