Financial Q&A: Why artwork and IRAs should never mix

Submit your question to Steve Dinnen at: money@csmonitor.com

Q: Is it possible to purchase artwork using a Roth IRA?

M.M., via e-mail

A: In a word, no. In many words, Paul Burkemper, president of St. Louis-based Burkemper Group, would point you to Internal Revenue Code 408(m)(2); Prop. Reg. 1.408-10, which discusses prohibited investments for IRAs that include collectibles such as antiques, precious gems and metals, rugs, stamps or coins, works of art, and alcoholic beverages.

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One reason for this regulation is that the value of these types of investments is very subjective, says Mr. Burkemper, and therefore very difficult for the IRS to monitor.

Bear in mind that if you invest in a prohibited investment (such as artwork) inside of your IRA, the entire IRA will then be considered distributed as of Jan. 1 of that year. It will then be fully taxable, and if you're younger than 59-1/2, there's also a 10 percent penalty.

If you're considering investing in nontraditional investments with your IRA money, consult an expert first. Even if the investment is deemed suitable, Burkemper advises further protecting yourself by establishing a separate IRA for each nontraditional investment. That way, if the IRS disagrees with your suitability assessment and deems it a prohibited transaction, only the assets in that IRA will face taxes and penalties.

Q: My mother, who I take care of, has her assets in an account with a broker I trust. Should I keep it all in there with the Wall Street crisis? It is diversified with stocks, bonds, and mutual funds.

J.M, via e-mail

A: If your concern is the safety of your mother's investments in the event that the broker joins the roster of troubled financial firms in the news, you need to determine if it's a member of the Securities Investor Protection Corp. (SIPC), says Susan Moore, a certified financial planner in Watertown, Mass. Her account statements, company literature from her brokerage, or a call to the broker can confirm this.

As long as the broker-dealer is a SIPC member, its customers are covered for up to $500,000 in securities, and up to $100,000 in cash claims. Take note that this insurance does not protect against the loss of value of your investments due to market declines. (For more information, visit sipc.org.)

Some broker-dealers also provide additional protection for their clients through a private insurance company, such as Customer Asset Protection Co., for account balances above $500,000.

On the other hand, if you're worried that your mother's investments are too risky for her, Ms. Moore advises that you to discuss these concerns with her broker. If you aren't satisfied that your mother's portfolio is appropriate to her age, financial circumstances, and risk tolerance, it might be time to get an independent opinion. You can find the name of a fee-only adviser who will act as a fiduciary (place your mother's interests above his or her own) at the National Association of Personal Financial Advisors (napfa.org).

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