Most Americans have been depositing money into their IRA account for years, waiting for the day in which they will get to use it to retire and live happily ever after. Yes, using your IRA as a way to retire is the main goal, but there is more you can do with your IRA than just that. Here’s how to maximize your returns and reduce your capital gains taxes by investing through your IRA.
You can use your IRA to invest, meaning that you can use the cash you have in your account and make a decent profit. You are not limited to the low returning investments available from your IRA custodian. You can invest in just about anything you like… including assets and property outside of the United States!
You can invest your IRA in a number of ways, but you have to be careful because there are also several investments that cannot be done using your IRA account. I entirely recommend you get someone with years of expertise to help you with IRA investments.
I’ll start by reviewing the types of investments that you can make with your IRA and highlight the ones that you cannot. Whatever your reason for using your IRA as an investment is, your goal should always be to secure your future retirement funds.
Let’s begin first by telling you where you can’t invest your IRA. You cannot use your IRA to purchase life insurance contracts. This is applicable to any type of life insurance policy, and the IRS is known to be quite resistant when it comes to this matter.
There are various reasons given for this rule. One popular theory is from the 1980s when viatical contracts were popular. People were “gambling” on the lifespans of others during the AIDS epidemic, which was seen as inappropriate for IRA investors. And, of course, you could use an IRA and a life insurance contract to create all kinds of tax loopholes.
Another investment that is prohibited using your IRA is in antiques and collectibles. This includes stamps, porcelain, baseball cards, jewelry, coins, wine, antique silverware, paintings, and any other inherited good that can qualify as an antique or collectible.
The reason for this rule is that you can’t personally benefit from an investment made by your IRA. You can’t buy artwork with your IRA, hang it in your office for a few years, and then sell it tax-free.
S corporation stocks and types of derivative positions are also, for the most part, banned as an investment using your IRA. I should make clear that S stocks are not in their entirety prohibited by the IRA, but they are not allowed as an S corp stock holding.
When I talk about derivative positions, I am talking about any trade that has an unlimited or undefined risk. This is because an IRA is supposed to be secure and a derivative is often based on speculation rather than concrete evidence.
The last type of investment that is basically prohibited in the United States is any investment that uses leverage or a mortgage. If you invest using leverage, you must pay ordinary U.S. tax on the gains derived from that leverage… thus, no one uses leverage in an IRA.
For example, if you have 50% leverage on a stock account, half of your gains would flow into your IRA tax-free and half would be taxed as ordinary income. For more on this, see: What we can learn from Mitt Romney’s IRA.
However, these tax rules only apply to investments made in the United States. If you take your IRA offshore and form an offshore LLC and UBIT blocker corporation, you can use leverage in your IRA investments with no tax cost. The only limitation is that you can only accept a non-recourse mortgage or loan.
- The above is a very brief and rough summary of the Unrelated Business Income Tax rules of IRAs. You should consult an expert if you plan to invest with leverage.
Now, let’s talk about the types of investments that you can make using your IRA.
Using your IRA to invest in real estate is one of the most popular investments done with an individual retirement account. Although this is fairly common, there are some rules associated with this transaction. This is especially true for those investing outside of the United States.
Under no circumstance can you use your IRA to purchase property that is owned by you or a related person. That is to say, your IRA cannot buy a property from you, even if the transaction is at fair market value. You will be under a lot of scrutiny when you use your IRA to buy any type of property, so be careful when you do this.
Great news for anyone who loves playing the stocks game, you can purchase stocks using your traditional IRA. Any stock that is inside of your IRA is not taxable. You can also invest in foreign stocks and other assets by moving your IRA out of the United States and forming an offshore IRA LLC.
This is a narrow list of do’s and don’ts, but it covers the basics of what you can and can’t do with your IRA. If you have questions, ask, but always remember this. For more on investing offshore, see: Here’s how to take your IRA offshore in 6 steps
I hope you’ve found this article on The Essential Do’s and Don’ts of IRA Investments to be helpful. If you want more information or have any questions about what was discussed above contact me here.
Michael K. Cobb is the CEO and co-founder of ECI Developments which has properties throughout Latin America. He speaks all over the world on international real estate and is a board member of the National Association of Realtors.
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