Clients frequently ask about “non-traditional” investments in their IRA-especially in this investment climate. Let me quickly say that some of these investments are possible; however do not make any investments without consulting your tax advisors. Improper investments can result in disqualifying your IRA and subjecting yourself to IRS penalties and interest. Here we are briefly discussing some of the questions we have been asked.
While there is great latitude in permissible assets in an IRA, there are some restrictions. There are some assets which are prohibited (such as art, antique cars, etc.) There are also prohibitions against self-dealing (using IRA funds to purchase your home or borrowing money from your IRA). There are some investments which generate unrelated business taxable income, or UBTI (income which is taxed to the IRA and again when the money is withdrawn from the IRA). In addition, one must realize that some “nonstandard” investments are illiquid; therefore, how do you satisfy the required minimum distribution (RMD) amounts at age 70 and a half? While it is not our intent to say “never”, it is our intent to caution IRA holders that improper investing in an IRA can have severe and significant tax consequences.
Can I own real estate in my IRA? Perhaps. If you can find a custodian willing to hold the real estate, you are not engaged in self-dealing, and you have other IRA assets from which to take required minimum distributions, then yes. But be careful of any potential UBTI consequences.
Can I use my IRA assets to start a business? Again, perhaps. This area is really complex. Realize that loses (as many startups do not succeed) are not deductible in an IRA. Also, a partial funding of the business with a loan for the balance is not permissible.
We at Paragon Financial Advisors will be happy to visit with you about any non-standard investing; however any such investments should be discussed with your tax counsel prior to investing. If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for clients.