For millions of Americans, the freedom offered by self-directed, traditional and Roth IRAs can be very appealing. These accounts are not limited to the narrow selection of investments that are typically offered inside employer-sponsored retirement plans, such as 401(k) or 403(b) plans. Almost any type of investment is permissible inside an IRA including stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs) and even real estate. Even qualified plans are allowed to hold most any type of security as well, although mutual funds, annuities and company stock tend to be the three primary vehicles used in these plans for various reasons. But there are a few limitations on the types of investments that can be held inside retirement accounts; this article explores the list of impermissible investment alternatives that cannot be housed inside a tax-deferred retirement account.
TUTORIAL: 401(k) And Qualified Plans

Prohibited Investments
The list of investment vehicles that cannot be housed inside an IRA or qualified plan should not be confused with the list of prohibited transactions that cannot be done with these accounts, such as lending yourself money from an IRA. When asked about the types of investments that can be used inside IRAs and other retirement plans, most instructors and experts in retirement plans will simply list the disallowed vehicles and then add the caveat that everything else under the sun is permissible. (Learn more in Avoiding "Prohibited Transactions" In Your IRA.)

The list of investments that cannot be used inside IRAs and other retirement plans is broken down as follows:

Life Insurance
As a general rule, no type of life insurance contract may be titled as an IRA or qualified plan, or be housed in such an account or plan. This includes whole life, universal, term and variable policies of any amount for IRAs, SEP and SIMPLE plans. Qualified plans contain one exception to this rule, known as the incidental benefit rule. This rule mandates that qualified plans are allowed to purchase a small amount of life insurance for a given plan participant. However, since the primary purpose of the plan is to provide retirement benefits, the amount of the death benefit must qualify as "incidental" compared to the plan balance.

The type of test that the IRS uses to determine this amount depends upon the type of insurance that is purchased in the plan. Defined contribution plans that purchase whole life insurance must meet the 50% test, which mandates that the amount of premium purchased in the plan per employee cannot exceed 50% of the employer's total contribution (plus any plan forfeitures) to each employee's account. For term and universal policies, the limit is 25% of employer contributions, plus forfeitures. (Interested in non-traditional investing? Make sure you follow the rules to avoid prohibited transactions, see IRA Assets And Alternative Investments.)

Types of Derivative Positions
Any type of derivative trade that has unlimited or undefined risk, such as naked call writing or ratio spreads, is prohibited by the IRS. However, many IRA custodians will prohibit the use of any type of derivative trading inside their accounts, except for covered call writing. This is because IRAs are designed to provide retirement security, so the use of speculative instruments such as derivatives is often disallowed. Those who wish to trade futures or options contracts inside their IRAs should look to more liberal custodians that permit the use of other types of alternative investments, such as hedge funds or oil and gas leases. But most custodians of major bank, brokerage and insurance-sponsored IRAs will not do this.(For more information on this advanced topic, check out The Basics Of Covered Calls.)

An IRA owner who discovers a collectible or antique worth thousands of dollars on sale at a garage sale will not be able to shield the tax on the gain from the sale of this asset inside an IRA or other retirement plan. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry, fine wine, electric trains and other toys cannot be held in these accounts under any circumstances.

Real Estate
Contrary to what many believe, it is possible to hold real estate directly inside an IRA. However, the IRA owner cannot benefit directly from the property in any sense, such as by receiving rental income or living in the property. It is therefore not possible to purchase one's house with IRA or retirement plan money. Many IRA custodians cannot facilitate the direct ownership of real estate or oil and gas interests, and those that do often charge annual administration fees that are much higher than normal. For more see House Your Retirement With Self-Directed Real Estate IRAs.)

As with all other types of collectibles, most coins made of gold or any other precious metal are disallowed with several exceptions, for example:

  • American Eagle coins (proof and non-proof)
  • American Gold Buffalo coins (non-proof)
  • American Silver Eagle (proof and non-proof)
  • Austrian Gold Philharmonics coins
  • Canadian Maple Leaf coins

In order to be allowed to be held inside an IRA, coins must be very pure in their mineral content and not seen as a collector's coin. Krugerrands and the old Double Eagle gold coins are disallowed because they do not meet this standard. But gold coins that the IRS determines to have more actual currency value than collection value may be permissible.

The Bottom Line
The list of investments that cannot be held inside IRAs and other retirement plans is miniscule compared to the vast assortment of vehicles that can be used. However, it is useful to know what cannot be held inside these accounts in some cases. For more information on impermissible investments inside IRAs or other retirement plans, consult your retirement or financial advisor. (Learn how to work with the tax man to avoid getting gouged when you convert your plans, see How IRA Contributions Affect Your Taxes.)

Related Articles
  1. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  2. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  3. Retirement

    Retiring in Thailand: The Pros & Cons

    It's a lovely land, but before relocating, get the skinny on this Southeast Asian kingdom.
  4. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  5. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  6. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  7. Retirement

    Is Retiring in France Safe Today?

    After a series of deadly terrorist incidents, some may be asking themselves this question.
  8. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  9. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  10. Products and Investments

    Cash Value vs Term Life Insurance: Which is Best?

    The debate between cash value life insurance and term insurance plus an investment plan is an ongoing one. Here's a look at both sides of the argument.
  1. What are the most common deferred tax assets used by individuals?

    Deferred tax assets – those that are only taxed when funds are withdrawn or the asset is sold – are quite common in estate ... Read Full Answer >>
  2. Can I hold multiple IRAs?

    It is perfectly legal to hold multiple IRAs and there are a number of reasons someone would choose to do so. The only limit ... Read Full Answer >>
  3. How does taxation on life insurance for a qualified retirement plan work?

    While life insurance is generally a prohibited investment for retirement accounts, participants in a qualified retirement ... Read Full Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  5. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  6. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
Trading Center