IRA Investments

The range of investments available to IRAs is seemingly endless. Contributions to an IRA must be made in the form of “cash,” but once deposited, IRA assets may be invested in a number of ways.

Most financial institutions — including commercial banks, savings and loans, mutual savings banks, mutual funds, credit unions, life insurance companies, and security dealers — provide custodial services for IRA accounts. For purposes of deposit insurance, IRAs are treated separately from a depositor’s “regular” bank accounts. The FDIC insures IRA deposits held by a bank up to $250,000 per depositor (all of a depositor’s IRAs at the same bank are combined for this purpose), separately from insurance on other accounts at the same bank. (For more regulations affecting IRA custodians, please refer to the IRA Custodians module.)

Although a wide array of investments are available for IRAs, some make more sense than others. For example, tax-exempt bonds held in an IRA may not be the most advantageous investment — the tax-exempt element is unnecessary because IRAs are already tax-deferred, and tax-exempt instruments usually earn less than comparable taxable assets. Taxpayers may not deduct capital losses sustained in an IRA account, so highly speculative investments may not be prudent. In addition, the tax code prohibits investment of IRA funds in certain assets.

The tax code generally bans IRAs from investing in collectibles. The term “collectible” includes works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, or other items of tangible personal property.

If an IRA does invest in collectibles, the IRS treats the purchase as a taxable distribution from the IRA equal to the cost — occurring on the purchase date.

There are a few exceptions to the ban on collectibles. IRAs may purchase certain coins:

• U.S. gold bullion coins (1 oz, ½ oz, ¼ oz, and 1/10 oz)
• The U.S. one-ounce silver coin
• American Eagle bullion coins
• Certain platinum coins
• Gold, silver, platinum, or palladium bullion that meets minimum fineness requirements for futures contracts and is held in the physical possession of the IRA trustee

No part of an IRA’s assets can be invested in life insurance. Where a life insurance policy is distributed as part of another qualified plan’s assets, that policy may not be rolled over into an IRA. The recipient may roll over the cash value of the contract into an IRA if the policy is surrendered.

S Corporations are “pass-through” entities that allow business profits to flow directly to shareholders, bypassing corporate taxation. The tax code prohibits trusts from owning S corporation shares. Since IRAs must hold assets in a custodial trust, IRAs cannot invest in S corporation stock.

Although the tax code places few restrictions on the nature of acceptable investments, it prohibits transactions with certain parties. Dealings between an IRA and a “disqualified person” — such as the IRA holder or a related party — may constitute a prohibited transaction. For example, an IRA owner may not borrow money from the account or lend it to companies he or she controls. Similarly, IRA holders may not use IRA assets to purchase stock in closely-held companies that they or their family control.

Since most IRA investors deal with institutional trustees or custodians who have agreed to honor these requirements, prohibited transaction rules normally do not cause problems. However, the IRA holder — not the trustee — is responsible for any violation.

The rule is somewhat less stringent when IRA assets are pledged as collateral for a loan taken by the IRA holder. In that case, only the pledged amount — not the entire account — is disqualified. If Ben had borrowed $600 from a bank and pledged his IRA as collateral, only $600 (plus earnings) would be taxable as a distribution that year, plus the 10% penalty.

Many IRA participants self-direct the investment of their IRA assets even though those assets are under the nominal control of the IRA trustee or custodian. With a few exceptions noted above, IRAs may be invested in a wide array of conventional and some non-conventional investments.

Self-directed IRAs let investors make their own investment decisions — ordering purchases or sales in much the same way as through regular brokerage accounts. Given an agreeable trustee, IRA investment alternatives are far-ranging, including private mortgages and real estate holdings. Freedom of investment choice may be the most clear-cut advantage of investing in an IRA over coverage by another type of qualified plan. Even where an IRA is not self-directed, an IRA owner has a choice of trustee or custodian.

Mutual funds, through their IRA programs, offer the advantage of a wide choice of investment options. Some funds offer the IRA owner the flexibility of switching IRA balances between different types of funds easily. Many funds charge only a small annual maintenance fee, while others impose none. However, many funds have a sales charge or “load” that can reduce the amount available for investment. Some funds also impose redemption charges upon sale of shares.

A self-directed brokerage account is especially attractive for investors who seek maximum flexibility and can tolerate some risk. Usually established through a sponsoring brokerage firm or financial institution, these accounts allow investment in shares of stock, corporate and government bonds, certain option strategies, and real estate partnerships. A few sponsors allow direct investment in residential or commercial real estate or other less conventional vehicles.

Although the self-directed brokerage account offers maximum flexibility, many investment decisions call for the expertise of a knowledgeable investor. These accounts can also be expensive for active traders, as a commission is charged every time a transaction is completed. For an individual who frequently switches investments, no-load mutual funds can shield assets from transaction costs.

Two questions arise regarding IRA fees and commissions: Are they deductible? And do they count toward the annual IRA contribution limit?

The separate payment of IRA trustee or administrative fees is no longer tax-deductible. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended miscellaneous itemized deductions for 2018–2025, and the One Big Beautiful Bill Act (2025) permanently eliminated this category of deductions. IRA trustee fees paid separately out-of-pocket are therefore not deductible.

Withdrawal of funds from the IRA to pay trustee fees is not a prohibited transaction; however, fees paid this way reduce the IRA’s invested balance. The payment of trustee fees — whether paid separately or from the IRA — is not treated as a contribution to the IRA, so contributors may deposit the full annual contribution limit and separately pay trustee fees without violating the excess contribution rules.

Unlike trustee fees, brokerage commissions incurred in connection with securities transactions are not deductible (they are regarded by the IRS as part of the price of the security). Additionally, the amount of commissions must be aggregated with the customer’s actual IRA contributions for the tax year for purposes of the annual contribution limit.