Self-Directed IRAs provide a lot of flexibility and freedom for account holders. However, there are a few restrictions on what assets the IRS does not allow. To learn more, watch today’s episode of “Your Gold Questions | Answered.”

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IRA No No’s: 12 Things That Aren’t Allowed in IRAs

Individual Retirement Accounts (IRAs) are an excellent way to grow your retirement savings through tax advantages. However, there are certain restrictions and rules you must follow when it comes to contributing to and managing your IRA. It’s crucial to understand what is not allowed in an IRA to ensure you do not incur penalties or lose out on potential benefits. Here are 12 IRA No No’s that you need to be aware of:

1. Contributions above annual limits: As of 2021, the annual contribution limit for IRAs is $6,000 ($7,000 for individuals aged 50 or older). Exceeding these limits can result in a 6% penalty on the excess amount.

2. Contributions after age 70 ½: Traditional IRAs require you to stop contributing after reaching the age of 70 ½, the age at which required minimum distributions (RMDs) begin.

3. Prohibited investments: IRAs are restricted from investing in collectibles such as artwork, antiques, stamps, and certain metals (except for certain types of gold, silver, platinum, and palladium coins and bullion).

4. Self-dealing: Using your IRA to engage in transactions with certain family members, such as buying or selling assets to them, is considered self-dealing and is not allowed.

5. Home purchase for personal use: Although you can use IRA funds for a first-time home purchase, there are limitations and criteria to meet. The home must be used as your primary residence, and the distribution is restricted to $10,000.

6. Loans: You cannot take out a loan against your IRA or use it as collateral for borrowing money.

7. Contributions of ineligible income: IRA contributions can only come from earned income, such as salaries, wages, tips, and commissions. Passive income sources, such as rental income or investment gains, cannot be contributed to an IRA.

8. Excess IRA contributions: If you contribute more than your annual limit or are ineligible to contribute due to income restrictions, you may face penalties. It is essential to monitor your contributions closely.

9. Early withdrawals before age 59 ½: With a few exceptions like certain medical expenses or purchasing your first home, taking distributions from a traditional IRA before reaching the age of 59 ½ will incur a 10% early withdrawal penalty, in addition to income taxes.

10. Failure to take required minimum distributions (RMDs): Starting at age 72 (or 70 ½ if you reached that age by the end of 2019), you must begin taking RMDs from traditional IRAs. Failure to do so can lead to significant penalties, with taxes as high as 50% on the amount not withdrawn in time.

11. Excess contributions to multiple IRAs: Be cautious if you contribute to multiple IRAs. Even if your total contributions are within the annual limit, exceeding the limit for any single account will still incur penalties.

12. Engaging in prohibited transactions: Certain transactions within an IRA, such as purchasing life insurance or collectibles, lending money to the account holder or family members, or buying real estate for personal use, are considered prohibited and can result in the account losing its tax-advantaged status.

It is crucial to stay informed about IRA regulations to maximize the benefits and avoid penalties. Consult with a financial advisor or tax professional to understand these rules thoroughly. A well-managed IRA can be a powerful tool in securing a comfortable and worry-free retirement.