Hi, everyone. Welcome to the Great Retirement Debate. I'm here with Jeff Levine. Jeff, What do we have to, for today's episode? It's good to be back with you, Ed. Alright. Today, we're gonna we're gonna debate an interesting one. We've got an interesting question for today. Are there certain investments or should I always or should I never hold certain investments within my IRA? In other words, is there always some you wanna have, or is there never something that you have? Let me stop you right there. Okay. Do you remember back in school? I tried to forget it, but go ahead. Whenever you had a true and false test, you can almost always bet that any choice that had the word always or never was false. Yes. Yes. There's almost always an exception. That's fair. So maybe a little hint to, to give away where we might be going later. But, you know, Ed, before we get into the the should, Right? Which is really the the the focus, the main focus for today. Let's talk about what you can own inside an IRA or Roth IRA because while a lot of people have you know, stocks and bonds and mutual funds and ETFs and things like that, what you might call more traditional investments inside an IRA or Roth. The tax code is actually not that limiting. In fact, you might say the other way. The tax code is actually really expansive in terms of what you can hold. There are very few things you're not allowed to hold inside an IRA or IRA. Right. The tax law actually says you can put anything you want into an IRA, except these things. Yeah. So so let's talk about those things. Really, three things come to mind. Right? You've got life insurance. That's the big one. You can't hold life insurance inside an IRA or a raw IRA. And by the way, when we say IRA, we're really covering both of them. We're just not gonna say IRA. Except for certain investments may do better in one than the other we get to them. Yep. Yep. That is fair. But in terms of what you can have. Right. Life Insurance is out for IRA or for Roth IRA. Though interestingly enough, if you have a plan, You are allowed to hold it. Not a lot of plans offer it for a variety of reasons, but you technically could hold it inside a 401k, but you cannot hold life insurance inside an IRA or raw thy ray. And the other one, of course, Ed, is collectibles. Right? So what are some examples of collectibles? That's something I have. Well, the coins, artwork stamps, liquor, believe it or not, is on that list. Yeah. It's, no holding booze inside your IRA. Right? It's true. Alright. And I went one more on the list of IRA and Roth IRA, no nos, which actually isn't even an IRA or Roth IRA rule. And that's stock of an S corporation. Right. And that has nothing to do really with an IRA or Roth IRA rule. It has to do with the s corporation rules. The s corporation rules don't allow an IRA or a Roth IRA to be an owner. So the moment an IRA or Roth IRA become an owner, it's no longer an S corporation because it's an ineligible owner. So three things you can never hold inside a IRA as life insurance, a collectible, or an S corporation stock. Now the S corporation stock, again, I mentioned is, if you do that, the penalty, if you will, is that it's no longer an s corporation. Alright, Ed. So what happens? Someone goes to the store and buy some booze with their IRA. Well, what what's the what's the penalty? What happens if you make a prohibited investment? It's a prohibited investment. It's a deemed distribution. Of that asset. You'll pay tax on that. So, basically, whatever you spent on that ineligible asset Right. Is a taxable event for you. You know, there's a new twist on these things now you may have seen a but last year, I think there was a ruling on NFTs, non fungible tokens. That was very good. I'm impressed that you knew that. Yeah. I'm not a I I'm not a big fan, but, some people call them, other things, but, you could get one of these tokens that is attributable to say an interest in artwork or some prohibited investment. And that would be the same thing. With that, it's actually more dangerous because you're taxed on the value of of what you paid for it. That's right. So if you pay paid for one of those flash cards or something or a piece of art, and it turns out it's worth You paid two hundred thousand in your ira. Your tax on two hundred thousand, even if the value turns out to be zero. That's right. Yep. Yep. So that's just another twist. But other than that, let's get back everything else, the universe. That's right. I mean, we've seen proposals recently. Just a few years ago, there was proposals to eliminate certain, private investments within Harry. Right. Right. None of that happened. So And unless we're talking about life insurance collectibles or s corporation, you can hold it. Alright. So with that said, Let's get back to the questions of should I make sure that I always or should I make sure that I never hold certain invest within an IRA or Roth IRA? What what what say you? Well, it depends on the investment. Now we're not talking about well, in some cases, we may be talking about traditional stocks, bonds, and funds. But what about alternative investments? One that comes up all the time is real estate. Yep. People with IRA money. Maybe they don't have money anywhere else, but they know they're construction people, they know real estate as an investment, not personal use at self dealing. That wipes out your ira. That's prohibitive. That's even worse than a prohibited investment. That's like a prohibited investment on steroids. Yeah. Prohibited transaction. It lose the disqualifies the IRA, but let's say a legitimate investment, apartment building, some real estate. Mhmm. And people like to do that in their IRS. I wouldn't do that in an IRA because believe it or not, the tax benefits are better outside of the IRA. Capital gains, step up basis. You have depreciation write offs. But with a Roth IRA, maybe it's not too bad because you put it in there and all the appreciation is tax free forever. Yeah. I think you just hit on a really important point, which is that certain accounts have different tax treatment to them, like an IRA and a Roth IRA, but certain investments also have different tax but those different tax treatments only happen when you use taxable dollars to invest them. Right? Right. So for instance, when you take money out of an IRA yet, it doesn't matter whether you earned money via a capital gain or whether you earned money via dividend or whether you earn money via interest. It doesn't matter. It's ordinary income as it comes out of an IRA because the IRA wrapper dictates the tax treaty. Right. So go back to my real estate example where outside the IRA, you got all these tax deductions and benefits and a big capital gain or even step up a basis. Yep. Capital gain rates if that happened, even if you did well, to your point in a traditional ira, what would have been a much, lower tax or more favorably taxed between Capitol Gates, step up bases at death, all ordinary income out of an IRA. Yep. Yep. And even if you do it inside a Roth IRA, you're still giving up benefits like depreciation. There's also right now, at least for the time being a QBI deduction if you have prob profitable So I think the key here, and I and I guess, you know, Ed, again, you kind of alluded to this earlier, always and never are harsh words. But in Roth IRA, on that real estate still, the the the upside is in the, you know, Unlimited. Yeah. So when I look at always or never, I I never I I don't like to use those unless it's a prohibited investment, then you should never do it. Right? But other than that, I would say it's there are things you should shy away from or prioritize differently. A good one example, would be, recently I was asked a question, like, can my IRA own section twelve o two stock? Okay. You know, qualified small business stock. And right now under the tax law, small business stock that's, meets certain requirements under section twelve zero two. It has to be a C corporation, the person has to hold it for five years. But if you if you meet certain requirements, then you can get the greater of ten million dollars or ten times your investment tax free in terms of return. So let's just say you you you bought a a a stock of this special type of business for, a million and a half dollars with non-IRA money. Oh, okay. I thought you when you started, you went with the IRA money. Well, that's what we're gonna get there. Right? If you go let's say you did non-IRA money. The the million and a half becomes effectively. You could sell it for with fifteen million dollars of gain and pay no tax. Again, you have to meet holding period requirements, etc. But if you hold that same stock inside a traditional IRA, can you? Sure. You can. It's a C corporation. It's not one of those three things. It's not S corp, it's not a collectible, and it's not life insurance. So can you? Yes. Should you? Well, again, If you do, the IRA shell is what supersedes the tax treatment of that qualified small business stock. So it's no longer a tax free gain. Right. So the the the test is really if the tax benefits are better outside of the IRA versus inside. Yeah. And and why I would still say I wouldn't use the word always or nevers. Look, if you thought you knew of an investment in this up and coming company, let's say your neighbor comes to you and says, Hey, I've.. And is your neighbor's name Peter Teal? Yes. That's right. Your neighbor's name is Peter Teal. Right. He says, I got this cool thing. It's called Paypal. Yeah. Someone comes to you like that and says, I want you to invest. And let's say it happens to be qualified small business stock, but your only money is in your IRA. You've never been able to accumulate enough money. Well, I'm not gonna say that, you know, you shouldn't do this investment if the investment itself is so good. You can't let the tax tail wag the investment dog. But the the the question becomes, is there other monies that you can prioritize? And I think that's really we get to, right, is, not so much the question of asset allocation, like, what investments should you own, but then the question of asset location, which is if you have different types of money, right, a Roth IRA, a traditional IRA, and money in a taxable account, What of which of your investments that you want to own because you like the investments, do you own in the different types of accounts? Right. Now the Roth IRA obviously is the best place because unlimited appreciation, all tax free. But, and that's what you that's why I alluded to Peter teal before because he has, I think, six billion in a Roth IRA, all, legit. All legit. The tax law try to make it illegitimate. Yeah. That's right. It it wasn't. Not everybody agreed with that, but ultimately he won. He has a lot of money. He can afford good attorneys. Yeah. Yeah. It's totally legit. Even whatever people say, all of that is tax free in his Roth IRA on roughly if you really wanna hurt about this. What I'm saying he has last count six billion in his Roth IRA. The initial investment. Do you remember what the initial investment was? I believe it was two thousand dollars, sir. I think it was seven hundred, something like that. Uh-uh. It was when the limit to make the contribution was two thousand. Right. Right. Right. Alright. But so, obviously, what we learned from that, besides, you know, you'd like to be like him, anything you think has high appreciation That's what you want in a roth. But if you lose money Mhmm. The government doesn't share your pain where it does in an IRA, Yeah. Not only in an IRA, but also even in a taxable account, right, because you could have a capital loss, etc. So, you know, if if you're a long-term investor, you don't worry about the short-term ups and downs. You look and you say, what's the thing I believe will appreciate the most over time, and actually the ideal investment for a Roth IRA from, again, not saying you want to go out and buy this investment. But if you have these types of investments already as part of what you own. You wanna locate things that are highly likely to appreciate over time and are tax inefficient, right, things that would otherwise generate a lot of taxable income, whether it be, through capital gains or through distributions of income. If it's inefficient, it benefits from the tax deferred wrapper of the Roth, right, the tax deferral that both IRS and Roth IRA share in common. And if it's an asset that will go up in value over time, then it benefits from the tax-free appreciation. So that's kind of what you would prioritize in the Roth, then with your taxable assets, really the question is, what's the thing that's gonna lose the least amount of money to taxes? Right? Like, which of your investments as it grows will lose the least amount of its profits to taxes. And that could be because, like you said, with respect to real estate, there's depreciation. Right. Could also be, you know, not too long ago. I know right now inflation is a hot topic. As we sit here today, you can go to a bank and earn five percent on a CD or a money market account in some cases, but not too long ago. That wasn't the case. And money markets and other fixed income instruments paid almost zero. Well, if you're making zero percent, It doesn't really matter what your tax rate is. Right? So it you know, during that time, I went into a bank, and only because I had to know. I got the, I won't say the name of the bank, but one by the one of the biggest banks. And they said they sent a flyer, and the bank was across the street. Will pay ten times the interest, and it didn't even come to one percent. Ten times zero. It's still zero. Okay. Wait a minute. I went into the bank. I want this ten times deal. What? What is that? Yeah. It was what? Well, so, you know, that that that's really, I think what it comes down to these. Should I always or should I never, you know, And it wasn't too long ago that some people would say you should never hold an annuity inside an IRA. I did that all the time, but that's not why you're holding it. You're holding it for the guaranteed benefit, the guaranteed income. I have annuities of my own Roth IRA because the only thing better to me than guaranteed income for life is guaranteed tax free income for life, which is what I have in my Roth IRA. So as we as we wrap up here today, and and we we think about this question. I wanna make one point before we wrap because we talk we've been talking about buying this and that, your Roth IRA. Yep. The funds have to be in your Roth IRA. You just can't transfer assets. Into your IRA or Roth IRA. We're talking about using already existing funds in your Roth IRA. Yeah. It's a great great point. You know, I I look at it that we all have two pies. Everybody thinks about their asset allocation pie. You know, how much of a of my circle? How much of it is stocks, how much of it is bonds, how much of it is real estate, how much of it is cash. But we also have a second pie, our tax pie. Right. And that how much of your assets are in tax free assets, like Roth IRA's and Roth 401ks. How much are in tax deferred assets, like a traditional IRA or a traditional four k, and how much are intangible accounts, like a a joint account, or a revocable trust account. And the question then really becomes how do you almost superimpose those puzzle those pies upon one another so that you make the most tax efficient choices you can. Right? It's not picking your investments based on the type of account. It's saying I have these accounts, and these are the investments I like. How do I overlay them? Where do I locate? That's right. Where do I locate? And it goes back to the point. I think we both made the big point is Where can I get the best tax benefits? Mhmm. Thinking about long term. Look, ultimately, it's not about how much you have. It's about how much you keep, and that means least we give, the less we give to uncle Sam in the form of taxes each year, the more we can put in our pocket. So, you know, as we come to a a close for today and we wrap up at I think, you know, the key thoughts are ultimately that always and never are harsh words. It it's there really are very few things in life and in planning or in taxes where we say always or never There's almost always exceptions to the rule. That said, there are three always. Always make sure you avoid collectibles. Always make sure you life insurance, and always make sure you avoid S corporation stock. But other than that, it comes down to what investments are right for you and then figuring out where are their most tax efficient places to locate those. That's right. And the point you made earlier, don't give up on something That's a good investment just because it might generate tax in an IRA. Yep. One way to always pay no tax and the least taxes to make no income. That's another way. Alright. So tell us, what do you think? Are there certain investments you think you should always or never hold in your IRA or Roth IRA? Let us know you can reach out to us on Twitter, Ed @TheSlottReport myself @CPAPlanner, and we look forward to seeing you on the next Great Retirement Debate.