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Self-Directed IRA Rules & Prohibited Investments

When 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.

Sign up for an account at Simple by 7/31/19 4:59 PM PT and get up to a $500 bonus and 2.02% APY (with qualified activities).

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

    Universal Life Insurance

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?

Mark Cussen
Mark Cussen, CFP, CMFC has 17 years of experience in the financial industry and has worked as a stock broker, financial planner, income tax preparer, insurance agent and loan officer. He is now a full-time financial author when he is not on rotation doing financial planning for the military. He has written numerous articles for several financial websites such as Investopedia and Bankaholic, and is one of the featured authors for the Money and Personal Finance section of eHow. In his spare time, Mark enjoys surfing the net, cooking, movies and tv, church activities and playing ultimate frisbee with friends. He is also an avid KU basketball fan and model train enthusiast, and is now taking classes to learn how to trade stocks and derivatives effectively.

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