What is an Allowable Investment?
Allowable investments at uDirect IRA Services include the following:
- Residential real estate, including: apartments, single family homes, and duplexes
- Commercial real estate
- Undeveloped or raw land
- REITs (Real Estate Investment Trusts)
- Real estate notes (mortgages and deeds of trusts)
- Promissory notes
- Private limited partnerships, limited liability companies, and C corporations
- Tax lien certificates
- Oil and gas investments
- Private stock offerings, private placements
- Judgments/structured settlements
- Gold bullion
- Factoring investments
- Accounts receivable
- Equipment leasing
Examples of Allowable Investments
To fully appreciate the breadth of these IRA investment options, it’s helpful to understand how some of them work in practice. For instance, investing in real estate notes allows your IRA to act as a lender, collecting mortgage payments and earning interest income tax-free or tax-deferred.
An investment in a private placement means your IRA can buy shares in a company that is not listed on a public stock exchange, such as a local startup or a real estate syndicate. This provides access to ground-floor opportunities.
Meanwhile, purchasing tax lien certificates lets your IRA pay off delinquent property taxes, potentially acquiring the property if the lien is not repaid or earning a high rate of interest. These examples showcase the diverse strategies available when exploring self-directed IRA investment options beyond traditional stocks and bonds.
Understanding Prohibited Transactions
Beyond the asset-specific restrictions on Life Insurance and Collectibles, every investor should understand the rules around prohibited transactions. The primary goal of these regulations is to prevent self-dealing. For example, your IRA cannot purchase a property that you or a disqualified person (such as a spouse, parent, or child) will personally use.
Also, you cannot provide services to an asset your IRA owns, such as performing renovations on a rental property by yourself. Any such IRA investment must be conducted at arm’s length and be for the exclusive benefit of the retirement account.
Failing to follow these rules can lead to severe tax penalties and potentially disqualify the entire IRA. Proper due diligence is the cornerstone of successfully managing all self-directed IRA investment options.
What Investments are Not Allowed?
You can invest your IRA in anything except Life Insurance Policies and Collectibles. As a result, you have a greater variety of assets to invest in for your retirement.
The IRS has a strict definition for Collectibles, and understanding this is crucial when reviewing your IRA investment options. Prohibited categories include artwork, antiques, rugs, stamps, gems, and most coins. Essentially, any tangible personal property that the IRS deems a collectible cannot be held in an IRA.
However, there is an exception to this rule for certain precious metals. Your IRA is permitted to own specific US-minted gold, silver, and platinum coins (like the American Eagle), as well as bullion in the form of bars or rounds that meet minimum fineness requirements. This allows for direct ownership of physical precious metals, provided they meet IRS standards.
For more information regarding rules governing self-directed IRA or 401(k) investments, please see IRA Rules.