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    Self-Directed IRA Rules and Prohibited Transactions

    Keeping your IRA in a tax-advantaged environment.

    Complete Responsibility and Control of Your Investments

    Self-directed IRAs give you great power to invest in non-traditional assets. These may be assets you are already familiar with such as real estate, private placements, and many more. But with great power comes great responsibility.

    It is very important to know that as a self-directed investor you are responsible for making all the decisions for your self-directed IRA. You are responsible for making sure you do not break the rules that keep your IRA in a tax-enhanced environment.

    3 Self-Directed IRA Rules You Should Never Break

    Breaking the rules can result in severe tax consequences. Whenever you are unsure of a transaction or situation, always consult with a financial professional before you act to get clarification. Here are the main rules that you should remember when engaging in a transaction.

    1. Disqualified Persons

    You cannot engage in a transaction with a disqualified person. These persons are listed below.

    2. Personal Benefit

    You cannot use the IRA for personal benefit. For example, rental income from an IRA owned property must be deposited in the IRA and not in a personal account.

    3. Disallowed Investments

    You cannot invest in disallowed investments per IRS rules for retirement accounts. Disallowed investments are explained further below.

    Guide

    Self-Directed IRAs: Getting Started

    What is a Disqualified Person?

    Disqualified Persons are people or entities that cannot do any direct or indirect deals, investments or transactions with the IRA.

    The IRA cannot do business with:

    • You, the IRA owner
    • Beneficiaries of your IRA
    • Your family members:
      • Spouse
      • Parents
      • Grandparents and great-grandparents
      • Children and their spouses
      • Grandchildren, great-grandchildren, and their spouses
    • Service providers of the IRA including those that give investment advice concerning the assets for which he/she receives direct or indirect compensation
    • 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 above
    Article

    5 Examples of Prohibited Transactions in Your Self-Directed IRA

    Allowed and Disallowed Investments in Self-Directed IRAs

    It comes as a surprise to many people that there is no list of approved investments for retirement plans. However, the IRS does have a list of what the law does not allow as an investment. Self-directed IRAs cannot invest in:

    Collectibles

    This includes any: work of art, rug or antiques, certain metals, gems, stamps and certain coins, alcoholic beverage, and any other tangible personal property that is a "collectible" under IRC Section 408.

    Life insurance

    Per the Internal Revenue Code 408 (a)(3) for individual retirement accounts, an IRA cannot invest in life insurance. 

    S-Corporations

    Trusts that qualify as an IRA are not eligible to be shareholders of an S-Corporation. (See Revenue Ruling 92-73)

    Guide

    5 Tips For Successful Self-Directed IRA Transactions

    Self-Directed IRA Prohibited Transactions

    Your retirement plan is intended to benefit you when you retire, and not a moment before you reach that magic age. Transactions that the IRS interprets as providing you immediate, personal financial gain on investments owned by your retirement plan are not allowed.

    Making a prohibited transaction or dealing with a Disqualified Person strips away the tax-deferred feature of your account. This makes the transaction automatically and immediately taxable. (See IRC Section 4975 for a complete list of prohibited transactions.)

    Examples of Prohibited Transactions

    You cannot use your self-directed IRA to:

    • Sell, exchange, or lease property you already own to your IRA
    • Transfer IRA income or assets to Disqualified Person
    • Lend IRA money or extend IRA credit to Disqualified Person
    • Supply goods, services, or facilities to Disqualified Person
    • Allow fiduciaries to obtain or use the IRA’s income or assets for their own interest
    Guide

    Real Estate IRA Rules and FAQs

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