For millions of Americans, the freedom offered by Self-Directed, Traditional, and Roth IRAs can be very appealing. These accounts are not limited to the narrow selection of investments that are typically offered in employer sponsored retirement plans, such as 401 (k) or 403 (b) plans.

Almost any type of investment is allowed in an IRA, including stocks, bonds, mutual funds, annuities, unitary investment trusts (UITs), exchange-traded funds (ETFs) and even real estate. Even qualified plans are also allowed to hold almost any type of security, although mutual funds, annuities, and company stocks tend to be the top three vehicles used in these plans for a variety of reasons.But there are some limitations on the types of investments that can be held in retirement accounts.

Prohibited investments

The list of investment vehicles that cannot be hosted in an IRA or qualified plan should not be confused with the list of prohibited transactions that cannot be done with these accounts, such as lending money to each other. ‘an IRA.When asked about the types of investments that can be used in IRAs and other retirement plans, most instructors and pension experts will simply list prohibited vehicles and then add the caveat that everything else is under the sun. is authorized.

Here are five investments that cannot be used in IRAs and other retirement plans according to IRS publication 590-A.

Life insurance

As a general rule, no type of life insurance contract can be titled as an IRA or Qualified Plan, or be housed in such an account or plan. This includes Lifetime, Universal, Term and Variable policies of any amount for the IRA, SEP, and SIMPLE plans.

Qualified plans contain an exception to this rule, known as the fringe benefits rule. This rule states that qualified plans are allowed to purchase a small amount of life insurance for a given plan member. However, since the main purpose of the plan is to provide retirement benefits, the amount of the death benefit should be qualified as “ancillary” to the plan balance.

The type of test that the IRS uses to determine this amount depends on the type of insurance that is purchased in the plan. Defined contribution plans that purchase whole life insurance must meet the 50% test, which requires that the amount of premium purchased into the plan per employee cannot exceed 50% of the total employer’s contribution (plus any lapse of the plan) to the account of each employee. For term and universal policies, the limit is 25% of employer contributions, plus lapses.

Types of derivative positions

Any type of derivative trade that presents unlimited or indefinite risk, such as bare call writing or ratio spreads, is prohibited by the IRS. However, many IRA custodians will prohibit the use of any type of derivative trading inside their accounts, except covered call writing. This is because IRAs are designed to provide security in retirement, so the use of speculative instruments such as derivatives is often prohibited.

Those who wish to trade futures or options contracts in their IRAs should look to more liberal depositories that allow the use of other types of alternative investments, such as hedge funds or oil and gas leases. . But most depositories at major banks, brokerage houses, and insurance-funded IRAs won’t.

Antiques / collectibles

An IRA owner who discovers a collector’s item or an antique worth thousands of dollars for sale at a garage sale will not be able to protect the tax on the gain from the sale of that asset in an IRA or other retirement plans. Stamps, furniture, china, antique silverware, baseball cards, comics, works of art, gems and jewelry, fine wines, electric trains and other toys may not be held in these accounts under any circumstances.

“Works of art were excluded from IRAs because in the early 1970s stolen Nazi-era works of art were found. Due to the protection the IRA would offer to assets held in the As a matter of fact, the government did not want to provide a vehicle that could house the stolen works of art are not being recovered, ”says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Massachusetts.

Real estate for personal use

Contrary to popular belief, it is possible to own real estate directly inside an IRA. However, under no circumstances can the IRA owner benefit directly from the property, for example by receiving rental income or living in the property. It is therefore not possible to buy your house with the IRA or the money from the pension plan.

“Real estate can be held in an IRA as long as the investments are not in your personal name; real estate expenses and income must be paid and deposited into your IRA; it does not buy your primary residence or any other home from vacation (by providing an indirect benefit); it does not buy or sell property already owned by you or any other excluded person, for example, your spouse, children or their spouses, parents, grandparents and great-grandparents -parents, grandchildren and great-grandchildren, ”says Carlos Dias Jr., Founder and Managing Partner of Dias Wealth LLC in Lake Mary, Florida.

Many IRA custodians cannot facilitate direct ownership of real estate or oil and gas interests, and those often charge a much higher annual administration fee than normal.

Most parts (but not all)

As with all other types of collectibles, most coins made of gold or any other precious metal are prohibited, with a few exceptions.Some authorized parts:

• American Eagle coins (proof and non-proof)
• American Gold Buffalo coins (non-proof)
• American Silver Eagle (proof and non-proof)
• Austrian Philharmonic Gold Coins
• Canadian Maple Leaf Coins

To be eligible for holding inside an IRA, coins must be very pure in their mineral content and not be considered a collector’s item. Krugerrands and old Double Eagle gold coins are not allowed as they do not meet this standard. But gold coins that the IRS determines to have a more real monetary value than the collector’s value may be allowed.

The bottom line

The list of investments that cannot be held in IRAs and other retirement plans is tiny compared to the vast assortment of vehicles that can be used. However, it is useful to know what cannot be kept in these accounts in some cases.

For more information about unauthorized investments in IRAs or other retirement plans, consult your retirement or financial advisor.