To help you save money for retirement, there are a number of options available.  One of the most common is the Individual Retirement Account (IRA).  While hundreds of investment alternatives are accessible through an IRA, there are some types of investments and transactions that the IRS doesn’t allow in IRAs.  Therefore, it’s important that you as an investor understand exactly what you can and can’t do with these types of accounts.

Special IRS rules governing IRAs fall into two general categories: those restricting the types of investments that can be held within an IRA, and those limiting the types of transactions that can be executed.  To help make you aware of these rules, we’ll take a look at each in more detail.

Technically, the IRS doesn’t actually “approve” assets in IRAs, but it does indicate which assets are not allowed.  Some of the investments that are prohibited include: life insurance, artwork, rugs, antiques, metals, gems, stamps, coins (with limited exceptions), alcoholic beverages, and certain other tangible personal property.

As mentioned earlier, the IRS not only prohibits certain types of investments, but also certain types of transactions.  Some examples of prohibited transactions are: borrowing money from your IRA, selling property to your IRA, receiving unreasonable compensation for managing IRA assets, using the IRA as security for a loan, and buying property for personal use (present or future) with IRA funds, among others.

Specifically, the rules regarding IRA transactions don’t allow for self-dealing.  In other words, the rules are designed to keep a reasonable distance between you —the investor — and your investments.

The relationship between you and the assets in your IRA is probably more complex than you thought.  One thing you need to understand is that you and your IRA are two separate entities in the eyes of the IRS.  That may seem logical, but it is an important distinction.  As the owner, you actually own the account, but there is also a custodian or trustee through which your assets are managed and held.  You can direct them to purchase or sell an asset for your account, but you cannot become directly involved in the transaction itself.

Also, you cannot be a manager, director, officer or other individual compensated directly or indirectly by any company you are investing in within the IRA either.  In addition, you cannot personally transact business with your IRA, such as buying assets from the account or selling to the account any assets you own outside of the IRA.  Once again, these rules keep you separated from the investments in your account.

It is essential that you are aware of the types of transactions that are prohibited, because the penalties for breaking the rules can be stiff.  If at any time during the year you engage in a prohibited transaction within your IRA, the account stops being an IRA as of the first day of the year (the same holds true if your beneficiary engages in such a transaction).  Your account is then treated as having distributed all of its assets at their fair market value as of the first of the year.  You will have to pay income taxes on this amount, and the IRS 10 percent early-withdrawal penalty may apply as well.

While many of us spend our time worrying about what we can do with our investment accounts, pay close attention to the things you can’t do as well.  Regular review of your IRA holdings will also help keep you in line with your goals and objectives.

A.G. Edwards generally acts as a broker-dealer, but may act as an investment advisor on designated accounts, and the firm's obligations will vary with the role it plays.  When working with clients the firm generally acts as a broker-dealer unless specifically indicated in writing.  To better understand the differences between brokerage and advisory services, please consult “Important Information About Your RelationshipWith A.G. Edwards” on agedwards.com/disclosures.

This article was provided by Patrick H. Yanke, CFP®, A.G. Edwards & Sons, Inc., Member SIPC, 3110 Edwards Mill Rd, Ste 300, Raleigh, NC  27612.  (919) 781-9470.

This article was brought to you by Steven W. Nelson.

Steven was licensed in 1999 and has recently joined the Keller Williams Realty for the opportunity to better serve his clients. He has a BA in Business Administration and has most recently been a sales representative in the Home Improvement industry. His motto in business is to “not just satisfy the customer, but make him/her, raving fans through ultimate customer service.” When not selling homes or meeting with clients, you can find him on the golf course, reading, working with the youth at his church, or watching hockey or sports in general. He and his new bride reside in North Raleigh in their dream home, an English style townhouse. He has no children, but he does have a miniature schnauzer named Snickers. He and his wife are members of the Capital City Club where Steven is the Vice Chairman of the Young Executives Club and chairman of the Philanthropy committee. As Chair of the Philanthropy Committee, he was a Team Captain for the Susan G. Komen Race for the Cure and volunteered for the Jimmy V Celebrity Golf. He has also served on the planning committee for the Big Bad Ball, which is a black tie event that raises much needed funds for the Hospice of Wake County. Additionally, he coaches youth basketball and sponsors a YMCA basketball team. He feels that it is very important to give back to the community.

As a Realtor, he specializes in Customer Service and negotiates the best price and terms for his clients. He makes his living selling real estate, but his life is fulfilled by helping people navigate the home buying and selling process. He aims to make it as stress free as possible. Contact him to see how he can assist you in your real estates needs or visit his website for his buyer’s packet or to search for homes.

Honest! Integrity! RESULTS!!!

Steven W. Nelson, Broker

Ida Terbet Team

Keller Williams-N. Raleigh

Ph: 919-604-6135

Email: StevenW@IdaTerbet.com

Web: www.StevenNelsonHomes.com

 

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