With an Individual Retirement Account or IRA, you can invest money accumulated from salary, wages, self-employment income, bonuses, profits from business and other sources. With an IRA, you can grow your money tax-free for retirement. However, not all investments are eligible for an IRA. Some investments are ineligible to be held in an IRA account. These include investment securities such as stocks or bonds issued by private companies; real estate; collectibles such as art or antiques; and beneficiary type accounts such as custodial accounts or trusts. There is one exception to the general rule that investments held in a taxable account cannot be used in an IRA: If you own stock in a company that has its principal operating location in Michigan and it is listed on a recognized exchange under the Securities Exchange Act of 1934 (the “Exchange Act”). Under the rules of the Michigan Department of Treasury (“MDoT’) , certain stock owned directly by you or your spouse/domestic partner (and not held through a company or trust), that is traded on a recognized exchange is eligible to be held in your individual retirement account. Moreover, this exemption applies only to the extent of current ownership interest only with respect to the applicable company.
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How to [Set Up an IRA]?
To open an IRA, you must file a Form 8606 with the IRS. Here’s how to file this form:
– File your tax return
– Fill out Form 8606 and attach it to your tax return
– Mail the filled-out and signed Form 8606, along with your tax return, to the Internal Revenue Service Center for processing
– In about 30 days you will receive a letter notifying you that your IRA has been opened
Investment Securities
That Are Not Eligible for an IRA
Below is a list of investments that are not eligible for IRAs:
– Investments in the stocks or bonds of a company that has its principal operating location outside the United States.
– Investments in collectibles, including art and antiques.
– Investment securities such as stock in privately held companies that are not traded on an exchange.
– Beneficiary type accounts such as custodial accounts and trusts.
– Real estate as it is an asset that can be held only by people with significant wealth.
Real Estate
Real estate is often a popular investment choice with IRA holders. This makes sense, as real estate typically appreciates in value over time. However, there are some drawbacks to investing in real property within your IRA. For example, the IRS does not recognize any tax-deferred appreciation for forgone income from rental property held within an IRA. Additionally, if you sell or exchange your property, you must withdraw the proceeds from your IRA account and pay ordinary income tax on them at that time.
Collectibles
Some collectibles are not eligible to be held in an IRA account. These include investment securities such as stocks or bonds issued by private companies, real estate, and beneficiary type accounts such as custodial accounts or trusts. There is one exception to the general rule that investments held in a taxable account cannot be used in an IRA: If you own stock in a company that has its principal operating location in Michigan and it is listed on a recognized exchange under the Securities Exchange Act of 1934 (the “Exchange Act”). Under the rules of the Michigan Department of Treasury (“MDoT’) , certain stock owned directly by you or your spouse/domestic partner (and not held through a company or trust), that is traded on a recognized exchange is eligible to be held in your individual retirement account. Moreover, this exemption applies only to the extent of current ownership interest only with respect to the applicable company.
Benefit Type Accounts (Trust)
A beneficiary type account is a trust that holds property for the benefit of another person. If the trust owns a business or real estate, it is ineligible for an IRA because an IRA is only for investments in stocks. However, if the trust does not own anything but instead holds assets such as cash or property, it can be held in an IRA.
Possible investment types that may be held in IRAs include:
Money market funds
Fixed-income securities like bonds, CDs and savings accounts
Domestic stocks (not foreign stocks)
Stocks
that can be held in an IRA
The following companies are listed on a recognized exchange under the Exchange Act and may also be owned directly by you or your spouse/domestic partner (and not held through a trust):
– All of the members of the Dow Jones Industrial Average
– Alcoa Corporation
– American International Group, Inc.
– Apple Inc.
– Bank of America Corporation
– Berkshire Hathaway Inc.
– Bristol Madison Aerospace, LLC
– Brown & Brown, Inc. – Caterpillar Inc.
– Chevron Corporation
– Cigna Corp. – Comcast Corporation
– General Electric Company
– Goldman Sachs Group, Inc. – Hewlett Packard Company
– Intel Corporation* *If you’ve purchased Intel stock from Intel since March 1, 2009 and it was held outside of an IRA, it is considered to be eligible since it can’t be sold for at least five years from purchase date. It must continue to remain outside of any taxable account until that time – which means if you were to sell at some point after purchase date, your investment would become ineligible for holding in an IRA.* *If you’ve purchased Intel stock from Intel before March 1, 2009 and it was held outside of an IRA as well as being sold in a taxable account before January 1, 2000 or inside an IRA between January 1 and December 31, 1999, then the issuance cost would
Conclusion
IRA distributions are not taxable for Michigan tax purposes.
FAQ’s
What are the investment types that are ineligible to be held in an IRA account?
Investment securities such as stocks or bonds issued by private companies are not allowed to be held in an IRA. Also, collectibles such as art or antiques, and beneficiary type accounts such as custodial accounts or trusts are not allowed to be held in an IRA.
What are the benefits of an IRA account?
The most important benefit of an IRA is the tax-advantaged way in which you are allowed to save for retirement.
The tax-advantaged nature of IRAs is a major reason that so many people choose to invest their money in this type of account. When you put money into your IRA, that money is taxed at a special lower rate than other investments. This means that you can earn more money and pay less tax on that income.
Another advantage of IRAs is that they are very flexible in the types of investments they can hold. They can be invested directly in stocks and bonds, or through mutual funds or exchange-traded funds (ETFs). They can also be invested in a self-directed brokerage account, where the investor controls the choice of investments and their timing. There are even certain types of IRAs that can invest in precious metals and collectibles.
What are the restrictions on IRA account investments?
The general rule is that only qualified securities can be held in an IRA account. Qualified securities are those that are purchased with after-tax money and that derive at least 90% of their value from assets such as stocks, bonds or mutual funds. Qualified investments also don’t include the following: Individual stock or bond issues
Collectibles such as art or antiques
To be qualified, a security also can’t be held in such a way as to provide a personal tax benefit such as estate tax reduction or charitable deduction avoidance. The most common qualification restrictions are on individual stock or bond issues and collectibles. Most individual stock and bond issues are ineligible for an IRA. You can buy company stock in your own company only if it is held by an independent trust outside of the IRA. And collectibles generally aren’t eligible for an IRA because they have little investment value other than their collectible prop
If you have any questions about whether a particular security is qualified, consult a financial advisor or tax advisor to ensure that you’re investing in the right way.
