Don’t Invest IRA Money Outside of Your IRA

Tuesday, February 17, 2015

By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott

You can invest your IRA funds in just about anything. However, you’re not allowed to invest IRA funds in collectibles, life insurance, and S Corp stock; but other than that, almost everything else would be allowed. It’s important to understand that when we talk about investing your IRA funds, we’re talking about investments inside your IRA. Someone recently learned a hard lesson when he invested his IRA funds outside his IRA, which caused a taxable IRA distribution that the IRS wouldn’t allow him to fix.

An individual took IRA distributions that he used to buy real estate as an investment for his IRA. He even hired professional tax and financial advisors to help him with the process. However, unbeknownst to him at the time, he didn’t realize that the real estate wasn’t owned by his IRA because he had taken an IRA distribution and bought the real estate outside his IRA.

He figured out this problem after the 60-day rollover period had expired. Not wanting to pay taxes on his IRA distributions, he applied to IRS for a waiver of the 60-day rollover period. He claimed that he was confused about how to buy the real estate for his IRA and that an illness contributed to his confusion.

Unfortunately, the IRS denied his request for more time to do the tax-free rollover, which meant that his IRA distributions used to buy the real estate were taxable to him. To add insult to injury, any income or capital gains from the real estate investment property would not be tax-deferred because the property was not held inside his IRA (he owns it personally outside his IRA).

His basic mistake was that he didn’t understand the “same-property” IRA rollover rule. That rule says that the same property distributed out of an IRA is the property that must be rolled over to an IRA. In this case, because cash was distributed from his IRA, then cash had to be rolled over (not the property he bought with that cash when it was outside his IRA). If he intended to have his IRA buy the real estate, he should have had his IRA buy the property, just as it would buy a stock, bond, or mutual fund, without him taking an IRA distribution.

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