The benefits of directing with self-directed IRAs are many. A self-directed individual retirement account (SDIRA) gives you the freedom, flexibility, and choice of how to invest your hard-saved dollars. You can expand and diversify your investment opportunities beyond the stock market into a variety of assets, such as mortgages, notes, real estate, and private placements. By diversifying your investments, you increase the chance of protecting and enhancing your retirement. These investment options have been available since 1975, when IRAs were introduced as part of the Employee Retirement Income Security Act of 1974. However, along with the countless benefits of Self-Directed IRAs, you have a few IRS regulations to follow as well.
Following the IRS rules for self-directed, tax-advantaged accounts is very important. The penalty for breaking a rule can mean losing the tax- advantaged status of your account and a big tax bill. These rules fall into three categories:
Disallowed Investments in Self-Directed IRAs
It comes as a surprise to many people, but there is no list of approved investments for retirement plans. However, the IRS does have a list of what is not allowed as an investment. Self-directed IRAs cannot invest in:
- Collectibles: Art, antiques, gems, coins, or alcoholic beverage, and certain precious metals
- Life insurance (See IRC Section 408(a)(3))
- S-Corporations: Trusts that qualify as an IRA are not eligible to be shareholders of an S-Corporation. (See Revenue Ruling 92-73)
Your retirement plan is intended to benefit you when you retire and not before. Transactions that can be interpreted as providing you immediate benefit or involve “disqualified persons” are not allowed. If your IRA engages in a transaction that is prohibited your account may be subject to penalties. (See IRS Section 4975 for a complete list of prohibited transactions.)
Here are some examples of prohibited transactions in a self-directed IRA. You cannot use your IRA to:
- Sell, exchange, or lease property you already own to your IRA
- Transfer IRA income or assets to disqualified persons
- Lend IRA money or extend IRA credit to disqualified persons
- Supply goods, services, or facilities to disqualified persons
- Allow fiduciaries to obtain or use the IRA’s income or assets for their own interest
You cannot engage in a transaction with a disqualified person. Disqualified persons are people or entities that can't do any direct or indirect transactions with the IRA. The IRA cannot do business with:
- You, the IRA owner
- Beneficiaries of your IRA
- Your spouse or other family members
- Your parents
- Grandparents and great-grandparents, your children or their spouses
- Service providers of the IRA, including those that give investment advice concerning the assets for which he/she receives direct or indirect benefit
- An entity— it could be a corporation, partnership, limited liability company, trust or estate—owned 50% or more (directly or indirectly) by a disqualified person
- An officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10% or more shareholder, or highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described.
You want to make sure you follow the IRS rules to protect the tax-deferred status of your accounts. An easier way to remember all these rules is to:
- NOT engage in a transaction with a disqualified person.
- NOT use the IRA for personal benefit.
- NOT invest in disallowed investments.
Whenever you are unsure of a transaction or situation, always consult with a financial professional before you act to get clarification or give us a call for assistance. We'd love to help plan for your financial future.