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Do's and Don'ts of IRA Investing

by Robert Carlson

Do's And Don'ts Of IRA Investing Splash image

Individual retirement arrangements (IRAs) are supposed to be simple and flexible investment vehicles, but their investment rules are more complicated and restrictive than many investors realize.

When you invest only in publicly traded stocks, bonds and mutual funds, there are no special issues. However, the tax law prohibits or penalizes some other investments by IRAs. Though part of the law for a long time, these pitfalls are becoming more important as the investment options available to mainstream investors increase and as investors are attracted more to “hard assets” and other non-traditional investments.

The restrictions on IRA investments are not well-known and, as a result, investors often stumble into penalties or other problems. The most common mistake is using a retirement account to hold an investment that falls under one of three categories: prohibited investments, taxable investments and transactions, and prohibited transactions.

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Robert Carlson is editor of the monthly newsletter Retirement Watch and the Web site www.RetirementWatch.com. He is also the author of numerous books and reports, including (with Eric Tyson) “Personal Finance for Seniors for Dummies".


Discussion

Frank from Florida posted over 3 years ago:

I DO NOT GET INVOLVED IN ANY OF THE PROHIBITION SITUATIONS
MENTIONED ABOVE. HENCE, I PAY TAX ON ANY WITH WITHDRAWALS
I MAKE, RIGHT?

I AM WORKING ON A POSSIBLE TRANSFER TO MY ROTH. ANY ADVICE?

WHY ARE THERE NO LIVE MEETINGS IN JACKSONVILLE? WE ARE A LARGE
CITY AND I NEVER SEE FLORIDA, NORTH EAST IN YOUR MATERIAL.

I AM SPENDING MORE TIME WITH AAII THE OLDER I GET.

THANKS, FRANK CERAVOLO



Bruce from Florida posted over 3 years ago:

Frank, why don't you start an AAII club? It's not difficult. Just contact HQ and set it up. Also, you should know that USING CAPS is the online equivalent of SHOUTING!!!!!!
Bruce


Dick from Texas posted over 3 years ago:

Author discusses MLP's but does not discuss ETF MLP's. Question is ETF MLP considered similar to Gold ETF's

Dick


David from Texas posted over 3 years ago:

What about REIT's? Are they considered pass-through entities?


Ed from Maryland posted over 2 years ago:

A serious omission from this article is mention of the inability to "short" stocks using funds from a self directed IRA. This is a ludicrous rule and should be amended. Numerous are the times that I could have made money when my research showed that a company is in trouble. A perfect example is the days long drama regarding Netflix that had only one inevitable conclusion, a severe and prolonged drop in price.


Shirley surber from Virginia posted over 2 years ago:

How does this site know my name.. when I have never used it Shirley


Charles from Illinois posted over 2 years ago:

Shirley, you browser may have its auto-fill option turned on, which remembers and inserts your information onto websites. Depending your browser, you can turn off the feature by clicking on "tools" or "options" and looking for the specific box to uncheck. - Charles Rotblut, AAII


Dennis from Virginia posted over 2 years ago:

Are the "distributions" from MPLs subject to UBIT or is the "pro-rata income" from MLPs subject to the excise tax? Distributions are frequently made that are more than the income reported.


Charles from Illinois posted over 2 years ago:

Dennis - The MLP will provide you with a Form K-1 that classifies what is included in the distribution. -Charles Rotblut


Timothy from Oregon posted over 2 years ago:

I hold some REITs (CIM, AGNC, NLY), as do many others I'm sure. The previous question wasn't answered. Does REIT income to the IRA fall under UBTI?

And how about Royalty Trust income, like HGT?


Edward from Tennessee posted over 2 years ago:

Typical of anything having to do with government.


John from Nebraska posted over 2 years ago:

Wonder if this means it would be a good idea Not to invest in AMLP, one of the ETFs in the AAII Model ETF portfolio, inside of a Roth to avoid potential tax problems?


Robert from Illinois posted over 2 years ago:

Can someone comment on the subject of "foreign taxes withheld from income (dividends and interest) received from international investments in an IRA.

Specifically, I hold a Canadian common stock in my IRA, and they withold 15% for Canadian taxes from my dividends. Can I deduct these as an offset to U.S. taxes on my Form 1040 tax return?


Charles from Illinois posted over 2 years ago:

Robert, my understanding is though Canada has an income tax treaty with the U.S., t you cannot deduct foreign taxes charged on an investment held in an IRA. -Charles Rotblut


Robert from California posted over 2 years ago:

Dear Mr. Carlson:

May an IRA own one's business?

There have been several articles (in NYT, WSJ, periodicals) featuring this as an overlooked and worthwhile IRA investment, mostly because it obviates financial market risk and allows the individual IRA owner to be in total control and with low expense.

One example I recall (NYT) is that of a fisherman whose physical capital (boats, bait, nets, tackle, etc.) and business earnings beyond the salary he paid himself were in entirety held in a self-directed IRA.

My accountant maintains that this is not self-dealing as long as one is paid a salary by the business and as long as one does not withdraw any business earnings.

Thank you.

Rob Karlin


Charles from Illinois posted over 2 years ago:

Robert - That gets into a complicated area of the tax code. If you are unsure about the advice your account is giving you, I would get a second opinion from another tax professional. -Charles Rotblut, AAII


John from Missouri posted over 2 years ago:

Why no answer on the REIT'S in an IRA?
Is there a problem with UBTI?


Charles from Illinois posted over 2 years ago:

REITs are different entities than MLPs, so the tax treatment is different. In general, REITs are not subject to UBTI, but there are exceptions such as a mortgage REIT that uses financings considered to be "taxable mortgage pools." If you have questions, consult a tax professional. -Charles Rotblut


Leo Sibille from Louisiana posted about 1 year ago:

I would like to have coppied this article
but my xp computer will only handle up to the
number 8 version and this uses number 9


Dennis Hallett from California posted about 1 year ago:

Good article- very informative


Jean Heza from New York posted about 1 year ago:

Excellent article with some great insights re IRAs


Bruce Weber from Illinois posted about 1 year ago:

One of the older comments mentions that "shorting stocks" is not allowed in an IRA. Can this be explained more? Does this apply to inverse ETF's?


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