The US Tax Code is not very clear in stating the types of investments that are permitted in IRA accounts. The Code specifically states a couple of investments that you cannot have in your IRA account.

The Code was drafted to give investors a wide range of alternatives when deciding how to invest their IRA assets. In general, just about any investment that a Bank or Mutual Fund or Brokerage would offer to the average investor is acceptable as an IRA investment. This applies to both a Roth IRA and Traditional IRA .

So, let’s first go through the normal investments you would see to determine what is permitted and what is specifically not permitted.

Common Investments Permitted

Generally you can purchase any of the following assets within your IRA:

• Common Stocks
• Bonds
• Mutual Funds
• Savings Accounts
• Certificates of Deposit (CDs)
• Exchange Traded Funds (ETFs)
• Money Market Accounts (MMAs)
• Treasury Inflation Protected Securities (TIPs)
• Real Estate Investment Trusts (REITs)

Common Investments Not Permitted

As a general rule, you can NOT use money in your IRA to invest in either of the following categories:

• Collectibles
• Cash Value (or Whole) Life Insurance

The prohibition on Whole life insurance is pretty easy to understand. But what is a collectible? According to the IRS, Collectibles include:

• Artworks
• Rugs
• Antiques
• Metals
• Gems
• Stamps
• Coins
• Alcoholic beverages
• Certain other tangible personal property

There are a couple of exceptions to the prohibition against Coins and Metals. You’re able to invest in:

• U.S. gold coins, and silver coins minted by the Treasury Department.
• Certain platinum coins and certain gold, silver, palladium, and platinum bullion.

What should the Average Worker invest in?

The answer to this depends upon your long range goals, how much time left until you plan to retire, and your risk appetite.

Are you age 25 or age 50? – If you are younger, you can afford to take some investment risk by investing in common stocks. If you are older, you may want to be more conservative and use Bank CDs.

What is your risk appetite? – If you really can’t stomach the volatility of the stock market – don’t! Put the money in safer bank accounts and CDs. If you are willing to take on more investment risk, then diversify the money among a number of investments – stocks, bonds, commodities.

Not So Common Investments Permitted

There is always someone who wants to invest in some more exotic type investments. The average investor would not invest in these things but I will present them just to give you an idea of what has been allowed over the years. Also, investors interested in many of these items will have to locate and open an IRA account with a Trustee/Custodian that specializes in the desired investment. This can be expensive.

• Stocks from an Intial Public Offereing
• Losely Held Stock – Family companies
• Rental Real estate
• Options to buy Real Estate
• Oil and Gas Royalties
• Stock Options
• Mortgages or other loans to be held for investment
• Residential or commercial real estate
• Domestic or Foreign real estate
• Raw land
• Foreclosure property
• Mortgages
• Mortgage pools
• Deeds
• Private loans
• Tax liens
• Private businesses
• Limited Liability Companies
• Limited Liability Partnerships
• Private placements
• Foreign currencies

Why should you bother with these? Potential for larger investment returns. Just in case you get creative with your IRA investments, you need to understand that it’s not that easy to invest in these items.

Your normal bank or Brokerage Company most likely will not let you put any money in these types of investments. Mainly, the institutions may not have any expertise in these areas and they don’t want to have to learn the ropes if the average investor is not going to use them. So the investor’s problem here is to find a Custodian who is willing to hold the investments on your behalf. If you can find one, you’ll pay some large administrative fees.

The IRS is Watching

The main concern of the IRS is that they don’t want anyone benefitting tax wise from the type of investment in the IRA. All investment transactions must be arms length and not self-dealing.

For example, one permitted investment is real estate. So an ingenious taxpayer tried to have his IRA buy a house, and then he proceeded to live in the house. He got a double benefit from the IRA. Other creative taxpayers tried to sell items they owned to the IRA. Still others tried to get around the prohibitions by involving family members in the transactions. The IRS system is designed to weed out these attempted situations and stop the self dealing attempts. So if you have ideas of getting creative don’t!

Invest As You Will

If you’re an average investor and just interested in the normal everyday investment classes, don’t worry about which investments are allowed. They will be, unless you get creative with your investments.