How you choose to open an IRA will depend on which institution offers them; but generally speaking, your IRA cannot invest in life insurance policies on yourself or any disqualified individuals; nor should it invest in anything which constitutes self-dealing.
Life Insurance
IRS rules generally do not permit life insurance contracts to be stored in an IRA; however, there are exceptions.
For you to avoid prohibited transactions, it’s essential that you ensure you are neither the direct or indirect beneficiary of a life insurance policy held within an IRA, nor can use its death benefits for personal gain.
Prohibited transactions refer to any activities undertaken within an IRA or pension plan which seek to gain personal benefits for yourself as byproducts of its transactions. Such activity might include investing in property you intend on using personally (e.g. a vacation home), or using rental income generated by such properties for personal expenses. One of the biggest mistakes people make in their IRA transactions is failing to accurately evaluate whether it might constitute prohibited conduct based on all relevant facts and circumstances in each case; professional advice can often help avoid most prohibited transactions altogether.
Real Estate
Your self-directed IRA cannot give you any direct personal benefit from owning property, such as living there or receiving rental income from it, so the exclusive benefit rule states. In essence, this means your IRA cannot purchase or own assets that could provide personal benefits for yourself – in other words, an exclusive benefit rule states your IRA cannot purchase assets that could provide direct benefit.
There are exceptions, however; such as when leasing property to unrelated individuals who pay rent. You cannot purchase and then use an IRA-owned home as vacation property (also extending a loan); such transactions would violate the exclusive benefit rule and other rules protect your IRA such as 50% rule restrictions on dealing with disqualified parties (which includes your spouse).
Collectibles
IRAs cannot invest in collectibles such as artwork, rugs, antiques, stamps and metals (except Kruggerands), including gold (except Kruggerands). The IRS allows your IRA to invest in half-ounce, one-quarter and one-tenth ounce U.S. gold coins and certain silver, palladium and platinum bullion (94% purity).
Your IRA cannot transact with you or anyone who falls within its definition, such as your spouse, parents, children or descendants. As an example of this restriction on transactions: If you were selling property to your IRA and accepting commission, that would violate prohibited transaction laws.
Self-dealing undermines the tax-exempt status of an IRA, leading to taxed distributions of your entire balance as soon as you reach age 59 1/2 and possibly incurring a 10% early withdrawal penalty. Therefore, it is crucial that all information on custodial account statements such as independent asset valuations be verified prior to investing or withdrawing money from it.
Investments
There are certain investments that cannot be purchased with an IRA account, including your primary residence or vacation property (providing direct personal benefit); any businesses owned or had significant interests in, like pizza parlors and gas stations; as well as investments made into companies that produce or sell products and services. The IRS refers to such actions as “prohibited transactions”, and engaging in such actions could lead to severe penalties and taxes being levied against you and your family.
Importantly, your IRA cannot co-invest with anyone considered a disqualified person – which includes family members as well as fiduciaries such as your custodian. That is because an IRA cannot invest in entities owned by both you and disqualified persons to which your IRA belongs more than 50%; Tax Court Case Swanson Vs Commissioner provides clarity here while Department of Labor Field Service Advisory 2000-10A supports this statement.
