Great news…there are actually very few investments you’re not allowed to make with an IRA or 401(k). The IRS doesn’t tell you what investments you CAN make, they just clearly spell out which ones you CANNOT make. Below is exactly what the IRS has to say about it.
The IRS states:
“The law does not permit IRA funds to be invested in life insurance or collectibles.
If you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.
Here are some examples of collectibles:
- Metals – with exceptions for certain kinds of bullion,
- Coins – (but there are exceptions for certain coins),
- Alcoholic beverages, and
- Certain other tangible personal property.”
Folks, that’s it. As far as investments go, an IRA is only specifically precluded from investing into life insurance and collectibles.
Why Don’t Most Custodians/Financial Service Companies Allow Self-Direction?
Quite simply…the almighty dollar. They’ll list other reasons such as perceived liability issues and complex transactions. But at the end of the day, if they can’t be compensated or easily compensated by permitting such investments, they are not going to permit you to make these investments. Plus, they aren’t required to allow them. You may ask why the IRS does not require financial service companies to offer alternative assets if they are permitted by the IRS?
The IRS notes:
“IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”
What about 401(k) plans?
The aforementioned information addresses the prohibited investments of an IRA, so what about the 401(k)? The IRS states in reference to a 401(k):
“In addition, under the Code, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. (IRC Section 408(m))
Individual retirement accounts also are not permitted to invest in life insurance. (IRC Section 408(a)(3))”
So, like the IRA, a 401(k) plan cannot invest into collectibles as defined by the Code. A 401(k) plan can invest into life insurance contracts as long as the plan documents are written to permit such investments to benefit the retirement plan.
So What CAN I Invest In?
Now that you have a good idea on what the IRS says your plans cannot invest in, what can your IRA or 401(k) invest into? The answer…truly…is anything else.
But, most of Fulcrum’s clients don’t find that particularly helpful. So I spend a great deal of time and effort detailing all the possible investments available to your plan, to give you ideas on investment options so you can develop a winning investment portfolio.
While not intended to be an all-inclusive list of assets, your IRA or 401(k) can invest into any of the following assets:
- Real Estate
- Precious Metals
- Tax Liens
- Discounted Notes
- Limited Liability Companies
- Limited Partnerships
- Foreign Currencies
- Private Placements
- Mortgages and Mortgage Pools
- Hard Money Loans
- Deeds of Trust
- Private Businesses