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Allowable Investments in IRAs

Lesson 3 of 5
Duration 6:23
Level Beginner
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Allowable Investments

IRAs may invest in most offerings. However, they may not hold debt. One cannot borrow from or lend from an IRA. Because of the restriction on debt many options and futures are not allowed nor is short selling of securities. IRAs can hold precious metals and real estate. However, these items present very specific issues particularly when there are Required Minimum Distributions, or RMDs.

For illiquid investments a formal valuation of the item must be made bi-annually which can be costly. If an RMD is required there must be other assets (such as cash) available in the IRA to make the payment.

Business Interests

IRAs may also own business interests – partnerships, LLCs, publicly traded partnerships. These holdings, especially if they are in a closely held business, have the same valuation pitfall as the illiquid investments described above. However, that is not their only issue. Although earnings and growth within IRAs are not taxable, unrelated business income is. Business income over the taxable threshold ($2550 for 2018) is subject to tax at 25% rising to 39.6% at higher income levels. Income earned by business interests other than investment earnings is subject to unrelated business income tax.

Publicly Traded Partnerships

Publicly Traded Partnerships can also generate unrelated business income tax. Annual filings are required. Note that these types of returns can be costly. One thing to note, from time-to-time the IRS announces areas that they feel require their focus as there are, in their opinion, either a large number of unfiled returns or a large amount of untaxed income. Recently, the IRS indicated that unrelated business income tax was an area of focus.

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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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Disclosure: Tax-Related Items (Circular 230 Notice)

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