The range of investments available to IRAs is seemingly endless. Contributions to an IRA must be made in the form of "cash", but once deposited,  IRA assets may be invested in a number of ways.

Most financial institutions (including commercial banks, savings and loans, mutual savings banks, mutual funds, credit unions, life insurance companies and security dealers)  provide custodial services for IRA accounts.  For purposes of deposit insurance, IRAs are treated separately from a depositor's "regular" bank accounts.  For example, the FDIC insures depositors' IRA balances held by a bank for up to $100,000 (all of a depositor's IRAs at the bank are treated as one account).  This is in addition to deposit insurance on other, "regular" accounts the depositor may hold at the bank. (For more regulations affecting IRA custodians, including advertising rules, please refer to Module 2.)

Although a wide array of investments are available for IRAs, some make more sense that others. For example, tax-exempt bonds held in an IRA might not be the most advantageous investment - the tax-exempt element of these bonds is unnecessary because IRAs, by their nature, are already tax deferred; and tax-exempt instruments usually earn less than other types of assets.  Taxpayers may not deduct capital losses sustained in an IRA account, so speculative investments may not be prudent.  In addition, the tax code prohibits investment of IRA funds in certain assets.


The tax code generally bans IRAs from investing in collectibles. The term "collectible" includes works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, or other items of tangible personal property.
If an IRA does invest in collectibles, the IRS treats the purchase as a taxable distribution from the IRA equal to the cost - occurring on the purchase date.            


Bob Barnes, age 32, directs the trustee of his IRA to invest $1,000 of his IRA assets in baseball cards. On July 17 of this year, the IRA purchases $1,000 the baseball cards for the Barnes' IRA. Barnes is considered to have received a $1,000 distribution from his IRA, which is includible in Barnes' gross income for this year. Barnes also faces a penalty for a premature distribution from an IRA.  Please note: an investment in collectibles results in a distribution to the IRA owner but does not disqualify the IRA's tax status regarding other investments.

There a few exceptions to the ban on collectibles.  Investors may purchase certain coins in their IRAs:  U.S. one-ounce, ½-ounce, ¼-ounce, and 1/10th-ounce gold bullion coins; the U.S. one-ounce silver coin; and American Eagle bullion coins. IRAs must purchase the coins from (or sell the coins to) authorized broker-dealers in American Eagle coins. IRA holders may also invest in certain platinum coins and in gold, silver, platinum, or palladium bullion.  To qualify, the bullion must be equal to or exceed the minimum fineness required for futures contracts in those metals and the bullion must be in the physical possession of the IRA trustee.

  Life insurance

No part of an IRA's assets can be invested in life insurance.  In cases where a life insurance policy is distributed as part of another qualified plan's assets, that policy may not be rolled over into an IRA.  The recipient may roll over the cash value of the contract into an IRA if the policy is surrendered.

 S corporation stock

S Corporations (sometimes called "Subchapter S corporations") are "pass through" entities - allowing the corporation to bypass corporate taxation and distribute business profits directly to shareholders (who are then responsible for taxes on their share of business profits), The tax code prohibits trusts from owning shares of a "S corporation". So IRAs, which must hold assets in  a custodial trust, cannot invest in shares of an "S corporation" stock.

 Prohibited transactions

Although the tax code places few restrictions on the nature of acceptable investments, it does prohibit transactions with certain parties.  Since most IRA investors deal with institutional trustees or custodians who have agreed to honor these requirements, the prohibited transaction rules normally do not cause problems for IRAs holders.  Institutions simply will not allow prohibited transactions to take place - if they are aware of the circumstances.  Dealings between an IRA and a disqualified person, such as the IRA holder or a related party, may constitute a prohibited transaction.  As an example, a IRA owner may not borrow money from the account or lend it to companies he or she may control.  Similarly, IRA holders may not use IRA assets to purchase stock in closely-held companies that they or their family control.  It is possible the trustee may not be fully aware of the circumstances and allow a prohibited transaction to take place.  The IRA holder is responsible for any violation, not the trustee.


Jennifer Gardner directs the trustee of her IRA to lend $50,000 to a shopping center developer. The loan is evidenced by a note, secured by a mortgage on the developer's home, and, given the nature of the transaction, yields a reasonable return. A privately negotiated, secured note earning fair market rate of return, while not a common investment in an IRA, is permitted.  However, if the developer is Jennifer's brother, the transaction is prohibited - not because of the type of investment, but due to the related parties.

The penalty imposed on persons who borrow from their IRAs or lend funds to related parties  is the severe -- disqualification of the entire IRA. The entire value of the account, as of the first day of the taxable year, plus any earnings for the year, are taxed as income to the holder that year.  The account's tax status is disqualified as of the first day of the year, so any contributions to the account that year are also disallowed.  Unless the individual has attained age 59½ or is disabled, the "constructive distribution" is also subject to the 10% penalty tax on premature distributions.

Example: On August 21, Ben Green, who is age 36 and not disabled, borrows $600 from his IRA. The value of his IRA at the begining of this year was $20,000. Ben must include $20,000 (plus any earnings of the account since January 1) in his taxable income this year. In addition, he is required to pay a premature distribution penalty tax of $2,000 (10% of $20,000).  
It would have been far cheaper for Ben to simply withdraw the $600 as a premature distribution and pay tax on the $600 plus a $60 penalty.

The rule is a little less stringent when IRA assets are pledged as security against a loan taken by the IRA holder.  Only the pledged value, not the entire account, is disqualified.  In the earlier example, if Ben had borrowed $600 from a bank and pledged his IRA as collateral, only $600 (plus earnings) would be taxable as a distribution that year - plus the 10% penalty.

 Self-Directed IRAs

Many IRA participants self-direct the investment of the assets in his or her account even though those assets are under the nominal control of the IRA trustee or custodian. With a few exceptions (discussed above), IRAs may be invested in a wide array of conventional and some non-conventional investments.

Self-directed IRAs let investors make their own investment decisions. For example, IRA investors may order purchases or sales to increase or reduce cash positions in much the same way as they could through regular brokerage accounts. Given an agreeable trustee, IRA investment alternatives are far-ranging - including private mortgages and real estate holdings.  From an employee's perspective, freedom of investment choice may be the most clear-cut advantage of investing in an IRA over coverage by another type of qualified plan. Even where an IRA is not self-directed, an IRA owner has a choice of trustee or custodian.

      Mutual funds

Mutual funds, through their IRA programs, offer the advantage of a wide choice of investment options. Some funds offer the IRA owner the investment flexibility of switching IRA balances between different types of funds just by making a phone call. Many funds charge only a small annual fee for maintaining the IRA, while others may not impose an annual maintenance fee. However, many funds have a sales charge or "load" that can reduce the amount of an IRA investment. Some funds also impose redemption charges upon sale of shares.

      Self-directed brokerage account

A self-directed brokerage account is especially attractive for those investors who seek maximum flexibility in the selection of their investments and who can tolerate some risks.
A self-directed brokerage account is an IRA usually established through a sponsoring stock brokerage firm or financial institution. These sponsors will allow investment in shares of stock, corporate and government bonds, certain option strategies, and real estate partnerships.  A few sponsors will even allow direct investment in residential or commercial real estate or other less conventional vehicles.  

Although the self-directed brokerage account offers maximum flexibility, many of the investment decisions call for the expertise of a knowledgeable investor. A self- directed brokerage account can also be expensive for active traders because a commission is charged by brokerage firm every time a transaction is completed.

Self-directed accounts with brokers may offer broader options than families of mutual funds. However, for an individual who frequently switches investments, investing IRA funds in no-load mutual funds shields assets from transaction costs.

      IRA Fees and Commissions

Two major issues are raised with regard to the payment of IRA fees and commissions. First, are these fees and commissions deductible? Second, do these fees and commissions count as IRA contributions for purposes of the IRA contribution limits?  The answer to these questions depends on whether the fees are (1) trustee's or administrative fees, or (2) commissions.
The separate payment of the IRA's trustee or administrative fees is a miscellaneous itemized deduction. Only the excess over 2% of adjusted gross income is deductible.  Withdrawal of funds from the IRA to pay trustee fees is not a prohibited transaction, however, the fees are not currently deductible by an IRA owner - as they would be if paid for by the IRA owner through a separate billing.

The payment of trustee fees is not a contribution to an IRA.  Therefore, IRA contributors may deposit the full annual contribution limit into the IRA and, in addition, pay the trustee fees directly without violating the excess contribution rules.  Fees paid for investment advice on the IRA also qualify for this treatment.

Unlike trustee fees or other administrative expenses, brokerage fees incurred in connection with a securities transaction are not deductible. These expenses are regarded by the IRS as part of the price of the security bought or sold and not as administrative costs.  In addition, the amount of commissions must be aggregated with the customer's actual IRA contributions for the tax year, for purpose of the IRA contribution limits.