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Custodian may limit IRA investment choices


Don Taylorq_v2.gifDear Dr. Don,
When it comes to retirement investing, I am aware that IRAs may invest in most common stocks and certain collectibles. However, which investment types are forbidden and why? For example, are master limited partnerships and options forbidden? Where can one find specific guidance as to which investments are "in" or "out"?
-- Bobby Boundaries

a_v2.gifDear Bobby,
You got me curious about the topic. It turns out much of the decision is up to the custodian of the individual retirement account. For the most part, collectibles are out. Here's what the Internal Revenue Service Web page "Retirement Plans FAQs regarding IRAs" has to say on the topic:

Are there any restrictions on the things an IRA can be invested in?
The law does not permit IRA funds to be invested in collectibles.

If an IRA invests in collectibles, the amount invested is considered distributed in the year invested. The account owner may have to pay a 10 percent additional tax on early distributions.

Here are some examples of collectibles:

  • Artwork.
  • Rugs.
  • Antiques.
  • Metals -- there are exceptions for certain kinds of bullion.
  • Gems.
  • Stamps.
  • Coins -- there are exceptions for certain coins minted by the U.S. Treasury.
  • Alcoholic beverages.
  • Certain other tangible personal property.

Check Publication 590, Individual Retirement Arrangements, or IRAs, for more information on collectibles.

Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate, but trustees are not required to offer real estate as an option.

I've seen IRA agreements for brokerage accounts that allow the individual retirement account owner to do some trading in options. For example, here is language from the Charles Schwab Web page titled "Options Trading in IRAs": "Currently, we allow approved clients to write covered calls and engage in long calls and puts in select IRAs."

Master limited partnerships, or MLPs, have a tax issue when held in IRA accounts. Distributions from the partnership can be classified as unrelated business taxable income, or UBTI, and could create a current tax liability in the individual retirement account.

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To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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