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.
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.
You cannot engage in a transaction with a disqualified person. These persons are listed below.
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.
You cannot invest in disallowed investments per IRS rules for retirement accounts. Disallowed investments are explained further below.
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:
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:
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.
Per the Internal Revenue Code 408 (a)(3) for individual retirement accounts, an IRA cannot invest in life insurance.
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 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.)
You cannot use your self-directed IRA to: