Self-directed IRAs give investors the ability to hold alternative assets, including real estate, private placements, notes, and other non-traditional investments. These opportunities can offer flexibility, but they also come with important rules that must be followed to help preserve the tax-advantaged status of the account.
When investing with IRA funds, there are restrictions on who your IRA can transact with and how IRA-owned assets can be used. Two key areas to understand are prohibited transactions and disqualified persons.
What Is a Prohibited Transaction?
A prohibited transaction is the improper use of a retirement account by the account owner, a beneficiary, or a disqualified person. These rules are outlined in IRC Section 4975 and are intended to prevent personal benefit from IRA-owned assets.
Examples of prohibited transactions may include:
- Selling, exchanging, or leasing property between your IRA and a disqualified person
- Using IRA-owned assets as security for a personal loan
- Using IRA-owned assets for personal use
- Lending money between your IRA and a disqualified person
- Using IRA income or assets for your own personal benefit
- Personally receiving income from an IRA-owned asset
The Internal Revenue Code does not provide a full list of investments an IRA can hold. Instead, it identifies what IRAs cannot invest in. The two specifically prohibited asset types are life insurance and collectibles.
Relevant: Private Stock Investments: 5 Ongoing Responsibilities of the Self-Directed IRA Investor
Who Are Disqualified Persons?
Many prohibited transactions occur because a disqualified person is improperly involved in the investment. For self-directed IRA purposes, disqualified persons generally include:
- You, as the IRA owner
- Your spouse
- Your parents, grandparents, children, grandchildren, and their spouses
- Fiduciaries of the plan, including certain advisors, custodians, or administrators
- Anyone providing services to the plan
- Certain entities, such as corporations, partnerships, trusts, or estates, in which you own at least 50% directly or indirectly
To stay compliant, IRA investors should avoid transactions between the IRA and any disqualified person. Engaging in a prohibited transaction can have serious consequences, including the potential loss of the IRA’s tax-advantaged status.
These rules are part of the broader self-dealing restrictions, which are designed to prevent IRA owners from using retirement assets for current personal benefit instead of for retirement savings.
How Can IRAR Help?
IRAR Trust specializes in Self-Directed IRAs, helping investors understand how to hold alternative assets while staying within IRS rules. When investing in assets such as real estate, private lending, or private placements, it is important to understand prohibited transactions and disqualified persons so the account remains compliant and preserves its tax-advantaged status.
If you have any further questions, please get in touch with our team.
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