Asset Classes that are Compatible with Self Directed IRA's

by | Feb 28, 2017

The law that created IRA's - ERISA (Employee Retirement Income Security Act of 1974) - imposed only two asset-type-specific restrictions on self-directed IRA's:

  • IRA’s aren’t allowed to purchase life insurance
  • IRA’s aren’t allowed to purchase collectibles

(Purchases of these assets in an IRA will cause the amount of money used for that purchase to be classified as a "distribution", likely bringing with it a financial burden for the rule-breaking IRA owner in the form of taxes, penalties and interest.)

There are certainly other restrictions for your IRA that must be honored – such as the prohibition against any transaction that benefits a so-called “disqualified person” – but where asset class-based restrictions are concerned, if an asset is neither Insurance nor a Collectible, it’s quite likely fair game for your self-directed IRA.

Can Your IRA Own an S-Corporation?

It's widely believed that self-directed IRA's are prohibited from purchasing shares in S-Corporations, but this is not true.  If an S-Corporation is purchased in a self-directed IRA, there will be negative ramifications for the Corporation and other shareholders of the corporation, but not necessarily for the IRA that owns it.

"S" corporation status is a special tax election which causes a corporation to become a "pass-through entity".  In other words, as an S-Corporation, the corporation itself does not pay income tax, the liability for which passes through to the owners (shareholders) of the S-Corporation.  This can be a very favorable tax arrangement in many circumstances.

The law that created IRA's, ERISA (the Employee Retirement Income Security Act of 1974) explicitly prohibits only two types of assets:  Insurance and Collectibles.  S-Corporations are neither of those things, and thus not prohibited by ERISA to own S-Corporations.

However, IRS Revenue Ruling 92-73 (further supported by this appellate court case), shows that an IRA is not an eligible owner of S-Corporation stock . Ruling 92-73 clarifies that If an ineligible party - including an IRA - becomes owner of any shares in an S-Corporation, then the entire corporation loses its "S" status, potentially causing substantially negative tax ramifications for the corporation and all of its shareholders.  However, the IRA's ownership of the corporation's shares are unaffected, and no distribution is triggered, unlike with assets that are actually prohibited.

Bottom Line:  IRA's are not prohibited from owning shares in corporations.  But if any such corporation has elected "S" tax treatment, that election will be disregarded and the corporation will revert to normal "C" corporation taxation.

Far and away, the most popular type of investment in self-directed IRA's are:

    • Real Estate
    • Private & Hard Money Loans
    • Privately-Held Companies
    • Tax Liens, Tax Deeds and Tax Lien Certificates
    • Copyrights, Patents and Trademarks
    • Hedge Funds & Private Equity Funds

The extent of this flexibility is incredibly broad, including the most unusual asset class purchased in an IRA ever witnessed by the Self Directed Investor Society team:  Dairy Cattle!

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