Are you tired of buying the same old investments for your individual retirement account. (IRA)?
You don't have to.
Any IRA, whether traditional, Roth, SIMPLE or SEP, can invest in just about anything except life insurance, S-corporation stock and collectibles such as stamps, art and antique furniture.
On the other hand, just because you can hold real estate, limited partnership interests, tax liens and other exotic assets in a retirement account doesn't necessarily mean you should.
One problem with non-traditional investments is that they are complex and far more costly to manage in an IRA. Many banks and brokerages won't hold them. If you find an institution that will consider independent trust companies, be prepared for the paperwork and allow time for special approvals.
Moreover, IRS rules forbid putting family property or your business's stock in your IRA, or living in a house it owns. All of those qualify as self-dealing, a tax-code-defined prohibited transaction. You can't benefit from assets that the retirement account owns. A prohibited transaction triggers tax on the entire value of the account in which the transgression occurred.
There also may be liquidity issues. If an investment generates expenses inside an IRA ' such as for rental property repairs ' the account, not the account owner, pays the bill. But most non-traditional assets are illiquid, and the annual limit on contributions to an IRA could prevent you from infusing the account with cash.
A related problem involves annual IRA distributions required after age 701/2
. In an account with illiquid assets, you may not have cash for withdrawals. However, although the required minimum distribution (RMD) is calculated on the balance of all your IRAs, it can be taken from any of them if you have more than one. So the money could come from an IRA account with liquid assets.
Still, to calculate the RMD, you need to know what your account is worth, and that may prove difficult. Sponsors of private offerings often decline to furnish values for products. And if the IRS quibbles with an appraisal of real estate or business holdings, you could be penalized.
Attorney Natalie Choate, of the firm Bingham McCutchen LLP in Boston, Mass., recommends withdrawing the hard-to-value assets out of the IRA sooner rather than later. 'In the future, these assets will not complicate your RMD and will begin generating capital gains (on post-distribution appreciation) instead of ordinary income,' adds Choate.
Another negative: In a tax-deferred IRA, depreciation write-offs for business property and other potential tax advantages of certain holdings are lost. Meanwhile, some income produced by IRA assets could trigger an immediate tax bill. When a retirement account or other tax-exempt entity does business, such as through a partnership, that may create unrelated business income (UBI) - which is taxable. Leveraged real estate also spawns UBI. An IRA that receives $1,000 or more of UBI during the year must file its own tax return, IRS Form 990-T, and pay the tax by April 15.
If you're still willing to take a plunge into real estate investing within your IRA and want more information, you should consult with your tax advisor and financial advisor to discuss the implications.
The majority of financial institutions still limit the range of IRA investment options to those that they offer - traditionally stocks, bonds and mutual funds. If you want to expand beyond these products, take the time to educate yourself, seek professional advice and understand the potential benefits and consequences of each investment before proceeding.