IRC Section 408(m): Understanding Prohibited Investments

Many people interested in a self-directed retirement account tend to ask “what can I invest in?” The quickest response to this question is not what can you invest in, but what can’t you invest in. The Internal Revenue Code (IRC) imposes clear restrictions on certain types of investments to maintain the tax-advantaged status of these accounts. IRC Section 408 is where much of the law governing retirement accounts is established, but below, we will look at subsection (m), which states which investments are prohibited for self-directed retirement accounts..


Prohibited Investments Under IRC Section 408(m)

IRC Section 408(m) explicitly prohibits retirement accounts, including SDIRAs, from investing in certain “collectibles.” These are defined as:

  • Works of Art: Paintings, sculptures, or other artistic creations.

  • Rugs and Antiques: Items valued for their craftsmanship, age, or rarity.

  • Metals and Gems: Precious metals (e.g., gold, silver) and gemstones, unless they meet specific IRS-approved standards (e.g., certain bullion coins).

  • Stamps and Coins: Collectible stamps and coins (numismatics), except for specific government-minted coins like American Eagle coins.

  • Alcoholic Beverages: Wines, spirits, or other alcoholic products.

Investing in these collectibles disqualifies the portion of the IRA used for the purchase, treating it as a distribution subject to income tax and, if applicable, early withdrawal penalties under IRC Section 72(t).


Exception for Precious Metals

While IRC Section 408(m) generally prohibits investments in precious metals, it provides an exception for certain IRS-approved forms of gold, silver, platinum, and palladium. These exceptions are detailed in IRC Section 408(m)(3) and include:

  • Bullion: Gold, silver, platinum, and palladium bullion that meets specific purity standards (e.g., 99.5% for gold and platinum, 99.9% for silver) and is held by an IRS-approved custodian.

  • Government-Minted Coins: Certain coins, such as American Eagle coins, Canadian Maple Leaf coins, and other government-issued bullion coins, are permissible if they meet IRS criteria for purity and are held by a custodian.


Conclusion

Understanding the restrictions under IRC Section 408(m) is essential for SDIRA investors. By avoiding collectibles and focusing on permissible assets, investors can maximize the tax benefits of their retirement accounts while diversifying their portfolios.


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