What Investments are Not Allowed in an IRA?

Your self-directed retirement plan – whether an IRA, Roth IRA, 401(k), or other self-directed account – is open to a wide array of investment possibilities beyond traditional stocks, bonds, and mutual funds. Potential investment options include real estate, rental properties, fix-and-flips, wholesaling, mortgage notes, private companies, cryptocurrency, oil, gas, gold, silver, and much more.

Hearing this, investors often ask, “With all the possibilities, what investments are not allowed in an IRA or retirement account? Is X, Y, or Z investment acceptable?”

The Internal Revenue Code and the IRS guidelines regarding investments in an IRA or other retirement account are exclusive rather than inclusive: we’re only told what we cannot invest in, not what we can invest in.

There’s a variety of investment options you can pursue and just a few options that are deemed not permitted. Here are five types of investments that the IRS says are not allowed in a retirement account.

What Your IRA Cannot Invest In

1. Collectibles

Your IRA cannot invest in collectibles. That includes artwork, stamps, rugs, automobiles, alcohol, certain metals, and other items.

If you invest in an asset or otherwise use your IRA in a way that’s not allowed, it’s called a prohibited transaction. According to IRS guidelines, if your IRA engages in a prohibited transaction, your IRA ceases to exist. It becomes distributed, and you may have to pay taxes and penalties upon the distribution.

2. Loan to yourself or other disqualified persons

You cannot loan money to yourself or your business. For example, if you’re a real estate investor and you have an LLC or S-Corp, and you want your IRA to loan money to your business, that would be considered a prohibited transaction.

There are other people that your IRA cannot lend to beyond yourself. Your IRA cannot lend to anyone that’s considered a disqualified person.

Who are disqualified persons to your IRA? Anyone up and down your family tree: parents, grandparents, children, and grandchildren. Your spouse is also a disqualified person.

Any LLC or other entity trust or partnership that is owned 50 percent or greater by disqualified persons is also considered a disqualified person, as are your real estate businesses or your other businesses. Your IRA cannot loan money to any of these disqualified persons.

3. Property that you or any other disqualified person owns

You cannot buy property that you or any other disqualified person owns.

This includes any properties owned by you, your spouse, your LLC or trusts or corporations, your children, your parents…anyone mentioned above as a disqualified person.

One of the most common questions we receive is: “I own a rental property. How can I get that into my IRA?” It would be a prohibited transaction if you were to attempt to purchase your own rental property with your IRA.

Oftentimes, the follow-up question is: “What if I just sell that property to a third party and my IRA buys it from that individual?” That would be considered a straw-man transaction, which also would be prohibited.

The IRA is tax-privileged, so you need to go out and find new investments.

Video: What You Can’t Invest in With an IRA