What Investment Options are Available in my IRA?

Although there is no list of approved investments for retirement plans, there is a unique set of laws contained in the Employee Retirement Income Security Act of 1974 (ERISA) that relate to retirement plan investments.  

In general, the plan sponsor or administrator of an IRS qualified plan should apply the judgment that a prudent investor would use in investing for his or her own retirement.  In addition, certain rules apply to specific plan types.  For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401k plan, or another kind of qualified plan.

IRA Allowable Transactions

Under the IRS code neither participant-directed accounts (e.g. 401k’s), nor IRA’s can invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages.  However, they can invest in certain precious metals if they meet specific requirements.  

As per the above statement, coins are generally prohibited. But you are allowed to have uncirculated American Eagles, American Eagle Proofs, American Buffalos, Austrian Gold Philharmonics and Canadian Maple Leafs inside your IRA.  The IRS has determined that certain gold coins represent more currency than collection and are allowed now as IRA account options.

On the other hand, many gold coins, such as Krugerrands and old Double Eagle gold coins, are not officially permitted investments for IRAs, primarily because of their lack of purity.  IRA precious metals must be extremely pure in their mineral content if allowed by the IRS as an IRA investment option.

IRA Prohibited Transactions

The IRS allows the IRA account owner to have greater power over investment decisions than a qualified plan such as a 401k or 403b.  The custodian of a self-directed IRA carries out the directives of the IRA owner.  This allows the self-directed IRA owner the opportunity to invest in non-publicly traded assets, such as real estate.

However, self-directed IRA owners must be particularly mindful of the rules regarding prohibited transactions.

Certain transactions between a plan and a “disqualified person” are specifically prohibited by law.  Disqualified persons include an IRA holder, immediate family, and fiduciaries.

Prohibited transactions generally include the following:

• A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.
• Any act of a fiduciary by which plan income or assets are used for his or her interest.
• The receipt of consideration by a fiduciary for his own account from any party dealing with the plan in a transaction that involves plan income or assets.
• The sale, exchange, or lease of property between a plan and a disqualified person.
• Lending money or extending credit between a plan and a disqualified person.
• Furnishing goods, services, or facilities between a plan and a disqualified person.
  

If an IRA holder engages in any of the above prohibited transaction and that act remains uncorrected, the IRS code provides that the account is no longer considered an IRA and is treated as if all the assets were distributed on the first day of the taxable year in which the prohibited transaction occurred.  Additionally, if the IRA owner is under the age of 59½ on the date of the deemed distribution, the IRA owner is subject to the 10% additional tax on premature distributions.

To summarize, qualified plan and IRA investment options generally are very liberal in what they allow.  Be careful, however, when stepping outside the box.  Make sure that those investment contained within your accounts are allowed by the IRS, or there may be serious consequences.

 

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