Prohibited & Permissible Investments

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We all know what “prohibited” means. Webster’s Dictionary simply states, “that has been forbidden; banned.” Being at a red light and making a right-hand turn “prohibited” may not seem as sobering when compared to having a Prohibited Investment made by your IRA. Before making an investment, mull it over, talk to a professional…just make sure you make sure you are not investing into a Prohibited Investment.

Also, these are the prohibited investments for an IRA…regardless of whether your IRA is self-directed (or not) and whether you have a self-directed IRA LLC, IRA Trust or IRA custodian account held directly (no IRA LLC or IRA Trust structure).

However, what types of investments do the IRS state as being Prohibited?

No portion of an IRA may be invested in life insurance contracts; IRA status will be lost if such an investment is made or if the written agreement which establishes the IRA does not specifically prohibit it. Code §408(a)(3).

An IRA’s acquisition of a “collectible” is treated as a taxable distribution to the IRA holder of an amount equal to the collectible’s cost. A “collectible” is defined to include a work of art, rug, antique, metal, gem, stamp, alcoholic beverage and, with certain exceptions, any coin. Code §408(m)(2). Although an IRA’s acquisition of a collectible will not cause the entire IRA to lose its tax-favored status, many IRA custodial agreements prohibit investments in collectibles. Anyone using a self-directed IRA should avoid collectibles.

This does not come up often as an issue with a self-directed IRA, but can still happen.

An IRA may not be an S corporation shareholder. Code §§1361(b)(1)(B) and (c)(6); Rev. Rul. 92-73, 1992-2 C.B. 224. An IRA’s holding of shares in a corporation will not adversely affect the IRA or IRA holder, but will cause the corporation to lose its S corporation status.