As you know, an Individual Retirement Account (IRA) is tax-advantage retirement plan you can open at most financial institutes such as a bank or stock brokerage. They act as the custodian to your account. IRAs offer more flexibility on the types of assets you can invest in as opposed to employer-sponsored 401k plans. The IRS has few limitations on investment options, however, your custodian may limit you.
So, what can you invest in with your IRA? You can usually stash cash in interest-bearing accounts like certificates of deposits and money market accounts. Interest is usually taxed as ordinary income. However, if it’s in an IRA, it’s deferred until you take distributions during retirement. If you have a Roth IRA, you don’t pay taxes on distributions assuming minimal requirements are met.
Other types of common investments you can make include: stocks, bonds, mutual funds, savings accounts, exchange traded funds (ETFs), Treasury Inflation Protected Securities (TIP) and Real Estate Investment Trusts (REIT). Again, you may be limited to investments your particular custodian offers.
There are also some common investments that you cannot hold in your IRA. These include collectibles, whole life insurance and stock in S corporations. According to the IRS, here is what they consider a collectible: artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other tangible personal property. There are some exceptions: you can invest in US gold and silver coins minted by the Treasury Department and certain platinum coins and certain gold, silver, palladium, and platinum bullion.
The beauty of the IRA is the uncommon investments that you can use your IRA on. If you can’t find a custodian that will let you invest in things other than stocks, bonds and mutual funds, you can open up a self-directed IRA and be your own custodian. You can choose to invest in just about anything you want. These investments can include, but are not limited to: residential or commercial real estate, raw land, foreclosure properties, foreign currency, LLCs & LLPs, tax liens, deeds, private businesses, etc.
Finally, there’s one major risk to consider when using a self-directed IRA and that’s “self-dealing”. You cannot benefit further from assets held in your IRA. For example, if you buy a house, you cannot live there. Also, close relatives such as parents and children cannot live there either. Another example is buying a rental property and hiring your father to manage it. Anything that gives you an extra advantage is not allowed and the IRS will come after you!
If you have any questions about what you can invest in with an IRA, or are looking to open up an account, whether it;s a traditional IRA, Roth or self-directed IRA, contact the tax experts at the IRA Financial Group. They are there to put you ahead of their own bottom line!