What Assets Can You Hold Inside an IRA?
One of the reasons people like IRAs is their tax benefits. There are many investment options allowed in your self-directed IRA. However, not all investments are available within a traditional IRA, so you need to ensure that your IRA custodian offers the investment product you want.
Even for allowed assets, beware of the tax consequences of your investment. Some investments will turn out to be better than others if you are in a higher tax bracket and expect to make a taxable withdrawal from the account during retirement.
Check out what the IRS allows
The IRS has specific rules regarding IRAs. For example, you can invest in stocks, bonds, mutual funds, and other securities. However, there are some significant limitations to keep in mind regarding what your IRA is allowed to invest in.
Tangible assets, such as precious metals cannot be used as investments in an IRA. The IRS also prohibits life insurance policies and annuity contracts in an IRA. But even if the IRS prohibits certain assets, there are ways you can invest them in a self-directed IRA.
Stocks and bonds can both be held in a traditional IRA
Buying stocks through an IRA can help you choose which companies will perform well in the future. Stocks offer you a share of ownership in the company so that when the company does well, so do you.
Bonds are debt securities that corporations or governments issue. They pay out a portion of their income every year but do not offer as much growth potential as stocks. Diversification is critical here; holding only bonds can be risky because if interest rates rise, bond prices fall.
In fact, according to Forbes, “A 2012 survey by the Investment Company Institute and the National Association of Insurance Commissioners found that mutual funds were the most popular investment for IRAs.”
Mutual funds make it easy for you to invest without managing every aspect of your investment portfolio. There are no restrictions on which mutual funds you can hold in your IRA, although the fees associated with some mutual funds may mean they’re not the best choice for retirement accounts.
Annuities can be held in an IRA and will not be taxed until withdrawn. You can use this as a vehicle to fund your retirement account without paying taxes upfront. If you’re looking for guaranteed income at retirement, annuities may provide that for you, but they come with significant fees and loads and may not be appropriate for your IRA.
Unit investment trusts
These are like mutual funds that aren’t actively managed; instead, their value is tied to a commodity or index. It’s essential to keep up with the value of your UIT to ensure it’s worth what you paid for it when it comes time to cash out.
You can hold exchange-traded funds (ETFs) in a self-directed IRA or any other type of IRA. In addition to a broad-based index fund that tracks the S&P 500 or the Dow Jones industrial average, some ETFs follow bond indexes, such as the Barclays Aggregate Bond Index Fund.
Many ETFs track foreign markets, including China’s $1.5 trillion stock market and $7 trillion bond market. ETFs can also be purchased on margin through a margin account for an extra boost to your portfolio’s growth potential. However, margin allows for more losses — up to 50% of your original investment — if the market declines sharply.
If you invest in real estate as part of an IRA, it is up to you to ensure that the property will never be rented out or used in any way unrelated to your retirement plan so that the IRS will not impose penalties or taxes on your account. This means that you cannot rent out the property once purchased in your IRA if you intend to continue holding it in your account over time.
You cannot hold life insurance, art, and some types of derivatives in an IRA. Life insurance and whole life insurance are banned from an IRA. Art is also banned, and the same is said for some types of derivatives. Contact a tax consultant for more information if you are unsure about something.
Takeaway: You’ll want to make sure you understand how these different types of IRAs work for you before investing.