IRA Investing: The Rules

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IRA Investing Rules: The Dos and Don'ts

Powerpoint slides on a superior retirement planning strategy called Roth IRA on Roids which allows for tax-free distributions, tax-free growth, guaranteed principal and guarateed death benefits.Anyone who starts a Roth IRA and invests in an IRA will find that they have hundreds of options that are available including even a precious metal IRA. Investment choices include investing in stocks, mutual funds, bonds, derivatives, gold coins and real estate. Most people have a financial advisor who will advise them what is the best IRA and where to invest their money. It may be difficult to make these investment decisions, especially if the investor wishes to hold the investment in an IRA retirement account. Regardless of the available choices to the client, the CPA should be aware of all possible investments.

Since traditional IRA account investments are the most common, all CPAs are aware of these. The question is whether they are aware of investments that are outside of the country or involve real estate. Your CPA will need to know if these are viable investments for an IRA and whether they can be made legally. There are many of these types of questions that are not answered. There is plenty of information regarding distribution limits and deduction limits, but other issues are seldom addressed.

The Department of Labor has a minimal interest in IRA retirement accounts. The DOL does not deem an IRA to be a pension plan, so it is not covered by Title 1 of ERISA. Even though the DOL does not have a vested interest in these accounts, they do oversee all IRA transactions, making sure they are not prohibited. ERISA originally devised asset guidelines for IRAs and courts and government agencies have provided follow-up guidance. In 1974, IRAs were originated with ERISA, but in 1981, the Economic Recovery Act relaxed all eligibility rules, which allowed more people to participate in IRA savings. Restrictions were added in 1986, and in 1997, the Tax Reform Act continued to liberalize the trend. Now, IRA assets are huge.

Strict prohibitions were placed on IRA investments by Congress. Since the owner of the account usually manages any assets in the IRA account, Congress never saw the need for supervision or guidelines. With pension assets, the potential for abuse was far greater than with an IRA retirement plan. There are some rules that must be followed when making IRA investments. Most IRA owners have a great amount of leeway because a lot of investments are not addressed by law or any governing body. The rules are pretty straightforward. First of all, collectibles are not allowed and there can be no self-dealing with any funds in an IRA. This means that the funds in the account cannot be used towards other financial dealings. Life insurance is also not allowed.

If the IRA owner has any specific questions pertaining to allowable investments, they can obtain a letter from the IRS before investing. This usually takes between three to six months. If the owner of the account is considering any unusual commitments with the funds in the account, their CPA should review the ruling from the IRS. Exemptions involving prohibited transactions should also be reviewed. This will help the CPA locate anything that could possibly have an effect on the decision of the client.

Always be aware of any rules that relate to specific investments. Life insurance is one of the only assets that is completely prohibited. This was decided by Congress and was an attempt to protect the investor from marketing and sales pressure that is often found in the insurance industry. In most cases, collectibles are not allowed. This includes antiques, rugs, art, metals and gems, coins or any alcoholic beverage. There are some collectible exceptions, such as silver and gold coins that were minted in the U.S. It is advised that IRA investors restrict their dealings to United States investments only. An IRA retirement account cannot be used to transfer any funds overseas. Investing in real estate is not totally clear. It is possible for an investor to leverage any real estate that was purchased, as long as the transaction was structured carefully. There may be problems when the IRA owner attempts to borrow from the IRA if real estate is involved. CPAs should advise the account holder to obtain a ruling from the IRS prior to investing in real estate using funds from the IRA. If the client chooses to move forward with this type of transaction, the best properties to invest in are cash deals, real estate investment trusts or real estate mutual funds. In addition, as long as the IRA owner does not personally use the property, rental properties may be allowed.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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