Self-Directed IRA Rules & Prohibited Investments

investment ira typesWhen you participate in an IRA (e.g. traditional IRA or Roth IRA), a custodian or trustee will serve as the administrator of your account. You’ll find a myriad of IRA custodians available, and different custodians have different rules for the kinds of investments you can include in your account. Some administrators only allow customers to purchase CDs or mutual funds, while others are more liberal and will let you hold most types of registered securities in your account.

Still others, such as PENSCO Trust, permit nearly every type of investment under the sun to be held in their IRAs, as long as it’s legal. You can use this type of IRA, usually called a “self-directed” IRA, to hold real estate, oil and gas leases, and other alternative investments for your IRA.

But even self-directed IRAs aren’t without limitations. There are several types of investments that the IRS has unconditionally prohibited inside IRAs under any circumstances, including the following:

Prohibited Investments in an IRA

  1. Life Insurance. While annuities are allowed, you cannot purchase whole, universal, or variable universal life insurance inside any type of IRA. This rule also applies to life insurance in qualified plans, although the Incidental Benefit Rule provides an exception for very small amounts of coverage.
  2. Certain Types of Derivative TradingFinancial derivatives include futures and options contracts on securities or commodities. Many of the more aggressive self-directed IRA custodians will permit the use of derivatives inside their accounts, but any type of trade or position that has unlimited or undefined risk, such as selling naked calls, is prohibited by the IRS. The reasoning is that that level of risk is inappropriate inside an account that is designed to provide financial security during retirement.
  3. Collectibles and Antiques. Unfortunately, you can’t place that priceless family heirloom inside an IRA, nor the electric train set that your grandfather played with as a boy. Furniture, wine, fine art, stamps, precious stones, porcelain and pottery, silver and dinnerware, jewelry, comic books, baseball cards, and other collectibles cannot be titled in the name of any type of IRA.
  4. Your Personal Residence. You can’t hold any property that you personally use (i.e. your primary residence, vacation house, or spare place in the city) inside an IRA. Rental properties that you own are also prohibited. Other types of real estate holdings, like undeveloped land, may be permissible, but anything that you use personally is off limits. This means that you can’t use IRA funds to buy yourself a first or second home or investment property from which you will directly benefit in any sense. Likewise, if you manage rental or investment properties you cannot invest directly in any property you manage, because you’d be compensated for your association with that property.
  5. Certain Types of Coins. In general, you can’t hold any type of coin made from gold, platinum, or other precious metals inside an IRA. To be allowed in an IRA, a coin’s actual currency value must exceed its value as a collector’s item. The IRS does have a list of exceptions, however, including:
    • American Eagle coins that have never been in circulation
    • Proofs of American Eagle coins
    • American Buffalo coins
    • Canadian Maple Leaf coins
    • Australian Gold Philharmonic coins

Though you may use life insurance to fund many types of non-qualified plans, these IRA restrictions apply to all types of qualified defined contribution plans. It is also impermissible to take out a loan from your IRA to yourself or any family member, or transact business relating to any property held inside your IRA account with any lineal descendant or ascendant (such as renting out a house to your parents).

Final Word

Of course an IRA is a popular way of preparing for retirement and cutting back your tax liability. But not every asset and investment vehicle will fit into these accounts. If you have a self-directed IRA or a fairly liberal custodian, you’ll learn that the list of 100% restricted items is a short one.

Other than these five investment types – each of which has plenty of exceptions – just about everything else is allowed: stocks, bonds, CDs, annuities, mutual funds, UITs, REITs, CMOs, treasury and agency securities, real estate, and oil and gas interests. For more information on investments that cannot be placed inside an IRA, consult your financial advisor.

What’s the most unusual thing you’ve put inside your IRA? How has your custodian let you know when something just isn’t allowed?

  • David Coe

    Mark, great article on what you can and can’t do with your retirement savings. It’s refreshing to see a financial professional that is willing to look beyond Wall Street based investments to help their clients grow and protect their retirement accounts. To further add to you list of things to avoid , be sure that individual investors also don’t do business with “disqualified” individuals as they invest their retirement accounts. Anyone that is lineal ascendant (parents, grandparents) or descendant (children, grandchildren) are considered disqualified. Another disqualified party is any direct business partner. As an example, your IRA couldn’t buy a house and have your child live in it, even if they pay market rent. You also couldn’t sell a property your IRA owns to your mom and dad. Siblings, cousins, aunts, uncles? No problem dealing with them.

    Again, great article. Hope this helped add a bit more context.

  • Andy Nguyen

    Hello mark,

    Good and clear article. There is a contradictory point between you and other IRA custodians and I do not who is right. Please let me know.

    Pensco says that is is permissible to use IRA fund to buy real-estate. This contradicts to what you said in Parapgrah 4: “you can’t use IRA funds to buy yourself a first or second home or investment property from which you will directly benefit in any sense”.

    I cut and paste a paragraph from Pensco web site:

    If you have your IRA purchase real estate from an unrelated party and pay cash for it, and you do not use the real estate for personal reasons while it is in your IRA (i.e., you treat it strictly as an investment), there are no special issues.

    • Dustin

      This is old, but seems worth of a response. Both of the above are true and are not in conflict. A self directed IRA can buy real estate. The IRA must then benefit, but not you. If you are living in a house on the IRA owned property, then you are receiving a benefit and this would not be allowed.

  • Broad Financial

    It’s good to get familiarized with retirement investment options. People, most of them, get confused with the process. This would help them clarify some complex issues. Great info!

  • Cjunker

    Your article doesn’t mention automobiles as IRA assets. Under the original IRA rules I thought automobiles were permissible assets. If they were/are allowed, how would you distribute them?

  • Dean

    Prohibited transaction?

    I want to make a loan from my IRA to an LLC.
    However, I currently rent a property from a man who owns the property
    personally but is willing to pledge the property as collateral for the loan
    from my IRA to the LLC that he is a managing member for. The fact that the
    property is not owned by the LLC and not by my IRA but is owned separately by a
    private party who is not a recipient of the loan would seem to permit me to
    continue to rent the property if my IRA makes the loan to his LLC. He will not
    make the loan payments to my IRA. His LLC will. Can I continue to rent the property from him if my IRA makes the loan to his LLC?

    Your opinion:

  • William Jones

    I really appreciate reading articles like this. Blogs like yours who have expressed the do’s and don’t’s of this industry I am fairly sure have prevented countless prohibited transactions before they occur and for others have greatly improved their knowledge of proper investing. Thanks again and check out our blog when you get a chance.