You can shield your investments from taxes by keeping them in an individual retirement account. While the Internal Revenue Service limits contributions to cash only, you can use the money in your IRA to purchase a wide variety of assets. The IRS frowns on certain IRA investments, but you might be surprised at the wide range of acceptable assets.
An IRA will accept plain vanilla investments like stocks, bonds, savings accounts, certificates of deposit, mutual funds and exchange-traded funds.. You can open a self-directed IRA if your tastes run beyond plain vanilla investments, Unless the account is self-directed, your custodian may limit your purchases to assets that the custodian sells. While self-directed IRAs give you a lot of freedom, you also bear the responsibility to observe carefully the IRS rules regarding unacceptable IRA investments. For example, you cannot hold life insurance policies in an IRA, nor collectibles such as stamps, jewelry, rugs, art or antiques.
You may hold certain forms of gold, silver, platinum and palladium in your IRA. The metal must be at least 99.9 percent pure. Some coins minted in the United States, Canada, Austria and other countries fit the bill; others, such as South African gold coins, are off-limits. You can also hold precious metal bars, slabs and ingots as long as they are sufficiently pure. The IRS requires that your IRA custodian or trustee must hold the metal -- you cannot stow it in your attic. You can also hold exchange-traded funds and mutual funds that invest in precious metals or metal futures.
A World of Choices
Here is a partial list of sexy assets your IRA can hold: real estate -- both actual properties not for your own use and real estate investment trusts -- foreign currencies, limited-risk futures and options, mortgages and mortgage-backed securities, unit investment trusts, energy ventures, private companies, limited liability companies, warrants, partnerships, tax liens, equipment leases, commercial loans, junk bonds, penny stocks and gold-mining shares. The general rule is that you can invest in anything that isn’t specifically prohibited, so the list of acceptable assets will surely grow over time.
The IRS does not allow you to use your IRA to buy property for present or future personal use or use by family members. Nor can you split the cost of property between an IRA and nonretirement funds. For example, you can have your IRA purchase a residential property, but you can’t use nonretirement funds for the down-payment. If the IRA owns the property, you can’t live in it -- that would be self-dealing. You cannot make loans to yourself from an IRA, sell property to it, or use an IRA as collateral for a loan, The IRS will terminate your IRA if you use it for prohibited transactions, treat the balance as a distribution and slap you with a 10 percent penalty to boot.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.