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Prohibited Investments in an IRA or 401(k)

The IRS rules do not list the types of investments that may be made with a self-directed IRA or Solo 401(k) retirement plan. Rather, a small list of prohibited investments is outlined in the tax code. Anything that is not specifically disallowed is therefore available as an investment opportunity, so long as other provisions such as those against self-dealing are adhered to.

Collectibles

Assets deemed to be collectibles are prohibited for both IRA and 401(k) style retirement plans, as outlined in IRC section 408(m)(2).

Collectibles include:

  • Works of art
  • Rugs or antiques
  • Metals or gems
  • Stamps or coins
  • Alcoholic beverages
  • Any other tangible personal property specified by the secretary of the treasury.

In 1997, the tax code was amended to make an exception from the collectible exclusion for certain precious metals, as outlined in IRC Section 408(m)(3). Allowable precious metals include:

  • US Eagle coins in gold, silver, platinum & palladium
  • Gold, silver, platinum & palladium bullion with 99% purity
  • Certain foreign-minted coins that meet the bullion fineness criteria

Life Insurance

An IRA may not invest in life insurance contracts of any kind per IRC section 408(a)(3).

A Solo 401(k) may invest in life insurance so long as such insurance is purely an incidental benefit to the retirement benefits provided by the plan. There are specific rules surrounding such investments within a qualified employer plan in IRC section 1.401-1(b)(1) as well as a variety of IRS rulings. Handling of such insurance in the event of plan termination can be complex, so this is not always a beneficial strategy.

Sub-Chapter S Corporations

In the case of sub-chapter S corporations, there is a kind of reverse prohibition for retirement plan investors. S corporation rules in IRC Section 1361 limit the types of investors that may be shareholders. Generally, only individuals may be shareholders. IRA plans may not invest in S corporation shares as a result. There is an exception in section 1361(c)(6) allowing qualified retirement plans such as a Solo 401(k) to be shareholders.

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