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Prohibited Investments

The only investments not allowed in IRAs are

  • Collectibles [IRS Code §408(m)]
  • Life Insurance contracts insuring the life of the account owner [IRS Code §408(a)(3)]
  • S-Corporation stock (Only individuals may own stock in a Subchapter S corporation)

Life settlements are not prohibited investments under IRS Code §408(a)(3). A life settlement is the sale of a life insurance policy to a third party (in this case, the IRA) usually for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit. The policy owner receives a cash payment, while the purchaser of the policy (in this case, the IRA) assumes all future premium payments and receives the death benefit upon the death of the insured.

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% additional tax on early distributions.

Examples of collectibles include:

  • 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-B, Individual Retirement Arrangements (IRAs), for more information on collectibles.