There are a variety of investments that are allowed in an IRA, but the Internal Revenue Service has strict guidelines on what transactions it will not allow.
Some examples of prohibited transactions include:
- Borrowing money from an IRA
- Selling property into an IRA
- Using an IRA as collateral for loans
- Buying property for personal use with IRA proceeds
- Funding or paying premiums for life insurance policies
- Investing in collectibles, such as artwork, jewelry/gems, antiques, metals/coins (although certain exceptions apply), rugs, stamps, or certain tangible personal property
If one of these prohibited transactions occurs at any time during the year, then the account stops being considered an IRA as of the first day of that year. Furthermore, the IRA is usually treated as having distributed all of its assets at the fair market value as of the first of the year, which means that it is subject to all applicable taxes and penalties. Beyond talking to your advisor, it is important to consult a qualified tax and/or legal advisor for clarifications or questions.
Did you know? There can be further restrictions placed by an IRA custodian beyond those that the IRS prohibits. For example, certain banks who have custody of IRA assets may limit the choice of investments to money market funds or Certificates of Deposit (CDs).