Roth IRA Investing - Break The Rules At Your Peril!

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From the time our parents start disciplining us at a young age, to our more formative years in school, we're always taught to behave, and to follow the rules.

Of course, some of us listen more than others to the voice of authority. But unlike school, when you break IRS laws, you might get a little more headache than you're looking for. That's for sure!

In this article, I'll try not to harp on the point, yet illustrate how important is to follow the rules when investing IRA funds.

You would think Roth IRA investing possibilities are extremely limited by these rules. Well, they're not, and there are fewer than you might think, too! But it's definitely important to follow IRS guidelines in order to protect yourself and your assets in the long run.

So, the obvious question would be, what IS the penalty for breaking the rules for Roth IRA investing? Quite simply, it has to do with your taxation status on the account itself.

If you break certain laws or regulations, you could be forced to actually liquidate and cash out the account all together. So you and your account trustee have to pay close attention to the regulations set forth by the IRS as to avoid this situation.

But hey, it's not all bad! Together, we'll quickly go over some of the more basic rules so you can get a better idea of things.

When investing IRA money, like I mentioned, there are several types of investments/transactions that are forbidden. First off, you can't use the account as a security for another asset or loan.

When comparing a traditional IRA to a Roth, the Roth IRA investing rules are pretty much identical. The only difference being, the traditional account requires you start taking money from the account after the age of 70 1/2.

Let's face the facts: People are living longer these days, and this trend continues to move upward. It might be of value to you, the investor, to not have an age requirement on your account.

Also when investing IRA money, there are many different things that aren't allowed. These are things like furniture, art, gems, coins, etc. Basically you can't invest in things like antiques or collectables because of the difficulty that could arise should you have to liquidate the account. This comes into play because some of these items are seen as difficult to establish a value for. Thus, they are prohibited. However, even though putting your money into coins isn't ordinarily allowed, you can invest in US minted coins or bullion.

Another rule you can't ignore when Roth IRA investing is the "self dealing" guidelines set forth by the IRS. This basically states that you can't use the account to invest in a property that will benefit your immediate family (for example, renting it to your child or parent).

Any investment that ultimately benefits you on a personal level instead of the account would be considered as self dealing, so you also can't sell a property you already own to your IRA.

On the governments side of things, all they really care about when you're investing IRA funds is that your retirement is 1) secure, and 2) that your account/assets are easy to cash out when you eventually pass away.

They do this to make sure any beneficiary you name to the account could get the cash value of your IRA rather quickly and easily. Going back to the list of things you can't invest in, you can easily see now why such things would be prohibited. They're just harder to liquidate and establish value for.

Keeping in mind this rule, it's no surprise one of the greatest investments you can make with your IRA is Real Estate. Roth IRA investing regulations on real estate are quite slim. Not only that, but real estate is relatively simple to establish a value for if need be.

Going back to the self dealing rule for a second, this is one of the few stipulations that apply to real estate. What are the benefits of this? Well, real estate yields some of the highest returns possible for you and your account. Also the profits would be shielded from capital gains taxes, some state tax, and also tax free interest earned through the account.

It's okay if you still don't understand what's allowed and what's not. I'll admit, the rules can seem cumbersome at times. Have no doubt though, there are many professionals out there willing you answer any questions you may have and also point you in the right direction.

I recommend speaking to one of these professionals. Come retirement, I'm sure you'll be happy you did.

Ray Stockwell is a real estate investor who enjoys making money by investing in projects that help people and their communities, all without capital gains taxes. Visit his web site at

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