IRA Investments

Especially with the current financial situation, many people are concerned about making the right investment decisions for their individual retirement accounts (IRAs). While the IRS never gives investment advice, we can tell you that the law does not allow IRAs (including Roth IRAs) to make certain types of investments or engage in certain transactions involving self-dealing.

The law does not permit IRAs to invest in life insurance contracts. Also, under Code §408(m), IRAs cannot generally invest in many types of collectibles, such as:
- artwork;
- stamps;
- most types of coins;
- rugs;
- antiques;
- metals;
- gems; or
- alcoholic beverages.

The law also does not permit an IRA owner or his or her beneficiary to use any IRA assets to purchase life, health, accident or other insurance.

An IRA owner or any disqualified person may not engage in prohibited transactions with the IRA. Disqualified persons include the owner's beneficiary, the fiduciary and the owner's family members (spouse, ancestor, lineal descendant and any spouse of a lineal descendant). There are many prohibited transactions listed in the Code, including:
- using the IRA as security for a loan;
- selling, exchanging or leasing assets of the IRA;
- furnishing goods or services to the IRA; or
- borrowing or lending from it.

See Code §408 and §4975 for a complete list of investment restrictions and prohibited transaction rules, as well as their exceptions.

When an IRA invests in any collectible, that collectible's cost is treated as distributed to the IRA owner and may be subject to the additional 10% early withdrawal tax. In the case of an IRA owner or beneficiary who does not follow prohibited transaction rules, the IRA is considered to be distributed to its owner, at its fair market value, on the first day of the year in which the prohibited transaction occurs. The distributed amount is includible in income (except for the aftertax amounts in a traditional IRA and certain amounts in a Roth IRA) for the owner for the year and may be subject to the additional 10% early withdrawal tax. If a disqualified person engages in a prohibited transaction, that person may be liable for certain taxes.

Institutions that hold IRAs may impose additional restrictions on investments. For example, many institutions do not permit IRAs to invest in real estate, even though the law does not prohibit it.

Since the funding vehicle for SEP plans is a traditional IRA, and for SIMPLE IRA plans, a SIMPLE IRA, contributions, once deposited to these plans, become IRA assets. This means that these IRA assets are subject to the IRA investment and prohibited transaction rules discussed above. With a SEP or SIMPLE IRA plan, although the employer establishes and maintains the plan, it is the institution holding the IRAs for these plans that determines the investment choices available to those IRAs. Therefore, an employer's or an employee's search for a financial institution should consider the IRA investment options it offers.