IRA Financial’s Adam Bergman discusses whether or not you can invest in art or other collectibles with an IRA.
The law does not permit IRA funds to be invested in life insurance or collectibles.
If you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.
That’s what you find on the IRS website about prohibited investments. But is there a way to indirectly invest in art and other types of collectibles? The answer is: technically, yes. In his latest podcast, Mr. Bergman discusses a way to open up your retirement funds to these asset classes.
What Can You Invest in with Retirement Funds?
The IRS has never stated what you are allowed to invest in with your IRA or 401(k), they simply state what you cannot invest in. Most retirement accounts are limited in investment options by the financial institution that administers the account. Typically, you are only allowed to invest in stocks, bonds, mutual funds and the like. However, if you have a self-directed retirement account, such as a Self-Directed IRA, permissible investments run the gambit. Real Estate continues to be the number one alternative investment. Further, assets such as precious metals, cryptocurrencies and hard money loans continue to thrive as well.
One thing we get asked a lot is about investing in art with retirement funds. If you look at the above statement by the IRS, it would seem art is never allowed in and IRA or 401(k) plan. However, there is a way to have a stake in art, without directly investing in it. The key is to invest in a company that deals with art.
IRAs are not allowed to invest in life insurance (you can with a 401(k) if the plan allows it). However, you are able to invest in companies that sell life insurance. For example, you can invest in Met Life, without actually investing in the life insurance it offers. The same can be said about art and other collectibles.
How to Indirectly Invest in Art with an IRA or 401(k)
Sotheby’s is a popular auction site for art, jewelry, wine and other collectibles. You can invest in Sotheby’s stock on the New York Stock Exchange. Therefore, by investing in the stock, you are exposed to the art asset class. The one thing you have to keep in mind are the plan asset rules. In short, you can only invest so much in a company that deals with an otherwise impermissible asset. While you are not directly investing in the art itself, you are indirectly investing in art.
The Plan Asset Rules
The plan asset rules would be triggered if all IRAs and 401(k) invested in a particular investment company total 25% or more. Also, is 100% of an operating company, such as a retail store, are owned by retirement plans, then the plan asset rules will be in effect. If either of these are the case, then the actual products become assets of the IRA or 401(k). Therefore, if you were to invest in an art auction house and the aggregate of IRA invested there total more than 25%, the underlying asset (the art), would be considered an asset of the IRA or 401(k). Hence, according to IRS rules, would be prohibited and the investment would be distributed to you with taxes and penalties due.
If your IRA owned 15% of the company and another person’s IRA owned 15%, then the assets of that company are deemed “Plan assets,” since the IRAs own more than 25%. Be careful when investing IRA funds in such a company. You don’t want the plan asset rules triggered.
You must also keep in mind the prohibited transaction rules. Basically, your IRA or 401(k) has to receive the sole benefit of an asset. You, nor your lineal ascendants and descendants, can benefit from an IRA investment. For example, you cannot own a house in your Self-Directed IRA and rent it out to your son. This is a prohibited transaction according to the IRS.
Should You Invest in Art?
As we always say, we’re not in the business of offering investment advice. That’s what financial advisors are for. We’re just here to tell you different ways you may be able to invest in a particular asset class. Should you invest in art, even indirectly? That’s up to you and you planner to figure out! But, we do think this is a way to expose yourself to the high demand of collectibles.
Get in Touch
Investing in art and other collectibles is a tricky deal. If you’d like to know more about the plan asset rules and ways to invest retirement funds in different asset classes, please give us a call @ 800.472.0646. Thanks for listening to our latest podcast, and be sure to check out all of our older podcasts!