Tax and financial advice from the Silicon Valley expert.

Permitted investments for Roths and IRAs

There is a broad assortment of investments that can be held in a Roth or regular IRA account.

It’s easier to say what can’t be held than what can be held. You can’t hold collectibles or life insurance contracts in a Roth or IRA.

Collectibles include works of art, rugs, antiques, metal, gems, samps, coins, alcoholic beverages and other items specified by the IRS. Roths and IRAs may invest in US-minted gold and silver coins and coins issued under the laws of any state. IRAs may also invest in certain platinum coints and any gold, silver, platinum, or palladium bullion of a specified fineness.

Roths and IRAs aren’t permitted shareholders of S corporations, except for bank stock held on October 22, 2004, so S corporation stock generally is not a permitted investment for a Roth or IRA.

Although banks and brokerage companies may offer what they call “self directed” accounts, the choices might actually be limited. There are specialized companies that permit the owner of the Roth or IRA to make a broader assortment of investments. Those companies charge higher fees for the service.

In addition to the prohibited investment rules, certain transactions, such as buying and selling with related parties, are also prohibited. I’ll discuss those in a separate posting or article.

Note the IRS has applied a “look through” principle to Roths and IRAs to disallow personal losses on sales of securities under the “wash sale” rules when substantially identical stock and securities are purchased during the period from thirty days before to thirty days after the loss sale in a Roth or IRA account owned by the taxpayer. The taxpayer’s basis in the Roth or IRA account isn’t adjusted for the disallowed loss. A similar theory could be applied to other transactions that haven’t been specified, yet.

The Roth or IRA could be required to pay income taxes on income deemed “unrelated business income”, including rental income from financed real estate. I’ve written a separate post about the tax, “Does your Roth or IRA owe an income tax?” http://michaelgraycpa.com/2010/02/25/does-your-roth-or-ira-owe-an-income-tax/

Since many individuals have most of their investable assets in their retirement accounts, they should consider whether to make alternative investments with those funds. The key issues are 1) Will you have a higher return on investment on an after-tax basis compared to other alternatives?; and 2) Is the risk for this investment worth taking for the potential return? Also, be careful of asset concentration. Any investment should be part of a diversified portfolio.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Tax and financial advice from the Silicon Valley expert.