The Internal Revenue Service places few restrictions on the types of investments you can make with your Individual Retirement Account (IRA). You can buy stocks, real estate or almost anything except life insurance or collectibles like coins and artwork. Investing in partnerships, however, moves into a grey area because of IRS restrictions on self-dealing and unrelated business income. A partnership is a shared venture with one or more other parties, putting money into a business, real estate or other endeavor.
Partnership investments are allowed if the partnership specifically permits IRA participation and conforms to state laws. However, profit from a partnership could trigger "unrelated business taxable income" and subject your IRA to taxes. An example would be using your IRA to invest in a cattle operation that generates added income to the IRA.
A partnership investment also can violate the IRS rule against "self-dealing," or making an investment that produces a profit or return for you as well as the IRA. You could not, for instance, invest your IRA in a partnership with a spouse who would profit from your IRA investment. Anything that resembles a conflict of interest is prohibited.
Tax Status Threat
Many IRA trustees, such as banks or brokerage companies, will not allow investments in partnerships because of the tax complexities. The risk of investing in a partnership is that if the IRS deems it unacceptable, your entire IRA account could become taxable, which eliminates the main benefit of investing in an IRA in the first place.
Investments in limited partnerships usually are safer because the IRA is not a direct participant in the operation. These investments are more like buying stock in a company, where the IRA is simply an investor and not managing assets for direct benefit. Partnership rules can be so complex, however, that it's best to consult with your trustee or a tax lawyer before getting into a partnership.
- IRA Basics: What Types of Investments Can You Use in an IRA?
- Retirement Industry Trust Association: Alternative Investments
- Journal of Accountancy: The Dos and Don’ts of IRA Investing
- Good Financial Cents: 8 Unusual Things to Hold in Your IRA
- Virtual Ex: IRA Investments
- Smart Money: Unusual IRA Investments