Heads-up on coins
You can buy coins with your IRA:
- U.S. gold coins in 1-ounce, half-ounce, quarter-ounce and one-tenth-ounce denominations.
- 1-ounce silver coins minted by the U.S. Treasury Department.
- Certain platinum coins are also allowed.
Gold and silver coins have been measurements of value for thousands of years. They tend to be stable or go up when stock markets crash or inflation soars. Gold and silver have been through ups and downs in recent years.
But that doesn't necessarily mean they're good for every IRA. For one thing, they don't pay interest or dividends, so you won't be compounding returns between purchase and withdrawal. And many mainstream IRA custodians, like banks and mutual funds, don't offer this investment option.
So, coins may be problematic, says Meg Green, founder and CEO of Meg Green & Associates, a wealth management firm in Miami. "Where are you going to find a custodian to keep them for you?" she asks. IRS regulations require that coin storage be overseen by a custodian, but custodians don't have to offer the service.
The second problem is cash flow. "You need things that provide income," she says.
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That's so precious
Besides coins, the IRS since 1997 has allowed investors to use IRA funds to buy precious metals bullion, such as silver or gold bars. Like coins, your bullion must be stored for you, for a fee. Your custodian is expected to arrange that.
The following metals can be purchased with an IRA, subject to standards of purity:
Again, Green says she's not a fan, at least not for IRAs. For one thing, once you reach age 70 1/2, you'll be required to start taking required minimum distributions from a traditional IRA. The distribution is a percentage of your IRA's value. If you're holding bullion, "you'll have to get it valued every year" to compute your minimum distribution, Green says.
Bullion has another fundamental problem, in her opinion: "It doesn't perform over time. It's all peaks and valleys."
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A private mortgage is another little-known IRA investment opportunity. When you buy a mortgage, you're the banker, at least for one property. A private mortgage company can match you to a borrower and handle the paperwork. Your IRA lends to the borrower, and the loan is secured by the property.
Because you don't own the property, if the value goes up, you don't participate in the profits. However, your investment is backed by a real asset -- although the foreclosure crisis proved that doesn't eliminate risk. The return can be lucrative, compared with other interest-based investments such as certificates of deposit.
But tread carefully, advises Harold Evensky, chairman of Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Florida. "You have to find a custodian to do it, and most of the major companies don't," he says.
The second caveat: Typically, these mortgages are for above-market rates, which suggests creditworthiness issues. "If someone is paying you over the market, you need to ask why," Evensky says.
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Cross the property line
Buying real estate directly with your IRA is tricky. You'll need enough money in your account to cover all expenses: maintenance, taxes, etc. There's no commingling of non-IRA funds with your IRA investment.
Many IRA administrators won't handle real estate. Finding lenders to help with the purchase has historically been challenging, because any mortgage must be nonrecourse. That is, you and your IRA are off-limits to the lender.
Another important caveat: Buying property for personal use is prohibited with a traditional IRA. There's an exception. You may withdraw $10,000 from an IRA for a home purchase if you qualify as a first-time homebuyer. You'll owe tax on the income, but you won't pay a penalty.
But in general, you lose many tax advantages of real estate investing by using an IRA. Green, of Meg Green & Associates, suggests a simpler, less direct route.
"Do it through a REIT," she says, meaning a real estate investment trust. REITs invest in real estate and mortgages. Because they're actually stocks, they trade on the stock exchange.
"They're acceptable and they're income-producing," Green says.
Mind your own business
Say you've found a great business opportunity. If only you had money to buy it! Maybe you do -- but it's locked up in your retirement account.
Turns out you can buy a business -- or an interest in a business -- with your IRA. There's a catch, however. You cannot use your IRA in any way to benefit yourself before retirement. Nor can you or your close relatives make transactions with the IRA.
So, forget about working for the closely held business, or even managing it yourself to save money.
"It's potentially even more risky" than investing in mortgages, says Evensky. The long-term value is likely the capital gain if the business rises in value. "That's not a very effective use of an IRA," he says.
The fact that you can only be a passive investor also is a concern. "You have to ask yourself, does this investment make sense, no matter where the money is coming from?" Evensky says.
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Be careful with 'collectibles'
Before doing anything exotic with your IRA, make sure it's allowed by the IRS -- because many investments aren't. Generally, the tax agency bars investment in what are known as "collectibles." These include:
- Any coins that aren't specifically allowed.
And don't bother trying to invest in a vintage bottle of Bordeaux: Alcoholic beverages also are excluded as an IRA investment.
All of this means that if you use a traditional IRA to invest in collectibles, "the amount invested is considered distributed to you in the year invested," according to IRS guidelines. Translation: It's taxable.
Furthermore: "You may have to pay the 10% additional tax on early distributions," the IRS warns.
For more information on IRA investments, read IRS publications 590-A and 590-B.