What you can and can’t do with your IRA

Many people are unfamiliar with the rules governing private investments in retirement plans, including some sophisticated financial professionals. The reason for this is that 98% of the $27 trillion in retirement plans are invested in marketable securities. These assets are held at brokerage firms, banks, and insurance companies who are in the business of marketable securities. So for the most part, people have been unaware that there are other types of investments they could include in their IRAs. Here we take a look at what you can and cannot invest in with your IRA. 

In this video, Joe DiDomenico, Founder of WealthFlex, explains what types of investments are and aren’t allowed in your IRA and why. 

What are the types of investments allowed in IRAs?

Exchange-traded stocks, bonds, and mutual funds are the most common asset types in IRAs. But other asset categories including real estate, precious metals, private notes, and private equity are also allowed in IRA accounts.  

The rules around the types of investments allowed in IRAs were designed to afford a tax-advantaged way for all Americans to save for their retirement and relieve pressure from social security. 

When congress first passed legislation on IRAs, they wanted to avoid some unintended consequences, and so investment permissibility rules were put in place. These rules are defined by US Treasury Regulations (26 U.S. Code § 4975) and are detailed and governed by the US Department of Labor and policed by the IRS. Each has its roots in one of three major concerns:

Rule Number 1: No unfair competition 

The ERISA Act of 1974 was intended to encourage saving for retirement. It was a primary concern for lawmakers that the act did not reduce taxes on money put in retirement plans without any arms-length requirements. If the rules allowed IRA owners the ability to enjoy funds in their retirement accounts too much, they would never take taxable distributions. They would simply enjoy the things the IRA buys even before the time for retirement. This is why even collectibles are off-limits to retirement plans.

During the enactment of ERISA, many congressmen owned businesses that were not owned in tax-advantaged accounts. They wanted to prevent competitors who didn’t have to worry about paying taxes to have a pricing advantage over their family dynasty.  

Rule Number 2: Prevent the loss of estate tax revenue 

To lessen the load of having to police every transaction in retirement plans, it became off-limits to conduct business with lineal ascendants and descendants of a retirement account owner. This includes things like renting a home your IRA owns to your child or parent, but renting to your sibling or cousin is within the rules.

Without considering the estate tax issue, it would be too tempting for some people to pass wealth to the next generation by giving preferential treatment on transactions to family members, thus avoiding estate taxes. 

Rule Number 3: No benefiting today’s lifestyle 

Actively contributing to your retirement plan assets is also off-limits. Carrying out property improvements to investments in your IRA is off-limits. Such active participation by the account owner is considered making a contribution to your IRA outside of the conventions allowed by the rules, which is not allowed. The reason for this is that it makes it difficult for the government to limit the amount of contribution you are making to your IRA each year if it is done with labor.  

If you are making bonafide IRA investment to benefit your retirement, are not participating in the activity of the investment, and are not dealing with family members, you are likely to be in the clear. However, we recommend speaking with a tax professional about what you are looking to do with your IRA if your investments do not follow any one of these rules.   

If you enroll in a Yieldstreet IRA, we take care to avoid any such issues and ensure that all the investments you could choose to have in your IRA are 100% allowed. Learn more about how you can take retirement planning to the next level with a Yieldstreet IRA. Contact us at [email protected] with any questions.

Please note that Yieldstreet cannot provide tax advice, so please consult a tax professional for advice specific to your situation. 

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