As a general rule, the IRS prohibits investing in collectibles such as artwork, rugs, stamps, coins or alcohol beverages in an IRA account.
Art is considered an unsuitable investment because its worth depends on what someone else is willing to pay, making it difficult to monitor and track.
Art work investments in your IRA are prohibited as the IRS considers it to be a collectible, along with gems and metals, rugs, antiques, stamps and coins, and alcohol beverages. Furthermore, any transaction wherein disqualified persons gain an advantage would constitute a prohibited transaction and thus not eligible to be placed within your retirement account.
An Individual Retirement Account, or IRA, provides self-employed individuals and small business owners a tax-advantaged way to save for the future. There are three main kinds of IRAs – Traditional IRA, SEP IRA and SIMPLE IRA – each offering its own contribution limit (typically 25% of compensation or $66,000 in 2023).
The IRS considers any investment of an IRA in stamps a prohibited transaction, as the dollar amount invested constitutes a distribution and must be included as income on your tax returns. Furthermore, an early distribution penalty tax of 10% applies if you’re under age 59 1/2.
IRAs and other qualified retirement accounts can hold most forms of investments, with the exception of life insurance contracts and certain types of real estate investments. You cannot provide personal guarantees on loans taken out by your IRA as this would constitute an illegal transaction.
Many are aware that the IRS does not permit investments such as artwork, stamps, rugs, metals or alcohol in an IRA account; however, there are alternative to traditional IRAs called SDIRAs which might allow these types of investments.
One way of investing indirectly in works of art is through art funds, which are LLCs that own works of art. Such investments must comply with all rules applicable to IRAs, so investors must carefully consider if any transactions may constitute prohibited transactions.
Under plan asset look-through rules, investing in precious metals is prohibited as its value cannot easily be tracked and determined for taxation.
IRAs generally are prohibited from investing in collectible assets like artwork, stamps, rugs, classic cars, alcohol, metals and certain coins. Any attempts at investing with these types of funds is considered an unlawful transaction that must be reported and taxed accordingly as ordinary income for that participant.
Over the past decade or so, a well-kept classic car has returned a healthy 457 percent in investment returns – more than art (+241%), gems (195%), rugs (133%) or alcohol beverages like fine wine (267%) could offer. Still, it would be wise to consult with a financial planner prior to making such a substantial investment decision.
One must take extra caution when investing in collectibles such as non-fungible tokens (“NFTs”), art, antiques, stamps, coins and alcoholic beverages as these investments could constitute prohibited transactions that lead to tax liabilities as well as an early distribution penalty of 10% if done incorrectly.
Self-dealing rules and prohibited transactions exist to protect both you and disqualified parties from reaping personal benefit as a result of transactions within an IRA or pension plan. Any mistake can compromise the tax-exempt status of your retirement savings account; thus, investing with unrelated third parties is advised. Thankfully, several exceptions exist such as PTE 80-26 for this rule.
Metals and Coins
The Internal Revenue Service has stringent rules on which metals and coins may be held within an IRA account. This includes only bullion bars and rounds made up of gold or silver bullion as well as legal tender coins with certain fineness levels – not including coins with high collector value such as Proof American Eagle coins which may require special permission from their holders.
An exception exists if an IRA invests in a pass-through investment entity holding collectible assets, though how this works in self-directed IRAs remains unclear. Investing directly in actual collectibles is generally prohibited and can incur severe penalties; before proceeding down this path it’s advisable to consult with a qualified expert before taking this route.