Self Directed IRA Rules and Regulations - IRA Transactions

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.

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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

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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)

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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

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Real Estate IRA Rules and FAQs

Self-Directed IRA Rules

Are the rules for self-directed IRAs different?

No. The rules for self-directed IRAs are the same that apply to all IRAs. Please see the section above for examples of what is allowed and disallowed.

What are the requirements to open a self-directed IRA?

Almost anyone can open an IRA. All you need is a copy of a government issued identification and a credit card to pay for the account establishment fee. You can establish the account yourself. However, to make contributions to your IRA you (or your spouse) must have earned taxable income.

What is the IRS code for self-directed IRAs?

All IRAs including self-directed IRAs are covered under Internal Revenue Code 408. For information on specific account types, visit this page: Account Types

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Self-Directed IRA Rules and Prohibited Transactions

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