Self-directed IRAs allow for tax-advantaged investing in private placements, notes, real estate and other various assets used in self-directed IRAs. In order to avoid penalties and additional tax payments on investments, investors must pay attention to particular regulations.
When using your IRA to invest, there are restrictions regarding whom you can buy from and sell to, as well as how the asset can be used. It's important to stay aware of these restrictions which include prohibited transactions and disqualified persons. Don't let your IRA investment sail without familiarizing yourself with the rules and regulations first. Below, you will find additional details about these restrictions:
What is a prohibited transaction?
A ‘prohibited transaction’ refers to any improper use of a retirement account by you, your beneficiaries, or any disqualified person. For more information, IRC Section 4975 addresses prohibited transactions in detail. These transactions include:
- Selling, exchanging, or leasing any IRA asset of a disqualified person to the IRA
- Using IRA-owned assets as security for a personal loan
- Using IRA-owned assets for personal use
- Lending of money between an IRA asset and a disqualified person
- Dealing with the income or assets of an IRA for own interests and benefits
- Personally receiving income from IRA-owned asset
The Internal Revenue Code doesn’t list the types of assets that you can invest in; it only states what you cannot invest in. The only two prohibited assets are life insurance and collectibles.
Who are disqualified persons?
Many prohibited transactions develop from the improper involvement of a disqualified person. The following people are considered disqualified persons for the purposes of your self-directed IRA:
- Fiduciaries of the plan—This includes yourself and any advisors, such as the plan custodian or administrator
- Your spouse
- Your lineal ascendants (grandparents and parents) and descendants and their spouses (your children, grandchildren and their spouses.)
- A person providing services to the plan (corporations, partnerships, trusts, or estates) in which you own at least 50% of the voting stock, directly or indirectly
In order to remain compliant when investing with your self-directed retirement funds, you must refrain from participating in transactions with disqualified persons. Doing so could lead to the IRA losing its tax-deferred status. This rule is part of the “self-dealing” regulations, which prevent account owners from engaging in transactions that would provide personal benefits for using assets in an IRA, rather than saving for retirement.
If you have any further questions, please get in touch with one of our Account Specialists.