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Self-Directed IRA Rules and Prohibited Transactions

Self-directed IRAs give you great power to invest in non-traditional assets. Assets you understand such as such as real estate, private placements, and many more. But with great power comes great responsibility.  It is very important to know that:

  • 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 these 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.


Top 3 self-directed IRA rules to keep in mind:

  1. You cannot engage in a transaction with a disqualified person.
  2. You cannot use the IRA to take personal benefit.
  3. You cannot invest in disallowed investments.

 

What is a Disqualified Person?

Disqualified Persons are people or entities that cannot do any direct or indirect 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 DP
  • 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

 

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

 

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:

  1. Collectibles: Art, antiques, gems, coins, or alcoholic beverage, and certain precious metals
  2. Life insurance (See IRC Section 408(a)(3))
  3. S-Corporations: Trusts that qualify as an IRA are not eligible to be shareholders of an S-Corporation. (See Revenue Ruling 92-73)

 

Other important rules regarding self directed IRAs to keep your account compliant:

For more information on investments not allowed in retirement plans and how to protect your account visit the IRS website. Give us a call if you have an investment in mind or set up a free consultation at your convenience. 

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