IRS Rules & Important Dates

Self directed retirement accounts provide a great deal of freedom, flexibility, and a wealth of investment choices. However, these accounts have IRS rules & important dates that investors need to be aware of to maintain these benefits. The IRS mandated these rules to ensure that your retirement plan does not provide you any personal benefits until retirement. Be sure you understand these rules to keep your account in compliance. If you do not follow these rules, your plan could suffer penalties, taxation, or loss of its tax-sheltered status. You should always consult your attorney, tax, and investment professionals regarding your investment decisions.

IRS Rules & Important Dates

Prohibited Transactions

Some types of self directed transactions violate your IRA’s basic intent. These transactions subject your account to risks and penalties. Your retirement plan is not to benefit you before you reach retirement age. Actions providing immediate financial gain to the account holder are not allowed. Actions that benefit other disqualified persons/parties are also not allowed.

Examples include:

  • Borrowing money from your IRA
  • Selling, exchanging, or leasing personally owned property to your IRA
  • Using your IRA as security for a loan
  • Transferring plan income or assets to disqualified persons
  • Lending IRA money to disqualified persons
  • Extending credit on your IRA to disqualified persons
  • Furnishing goods, services, or facilities to disqualified persons
  • Allowing fiduciaries to obtain or use the plan’s income or assets for their own interest

Accredited Investor Rule

This rule directly applies to self directed IRA investors. Many self directed IRAs invest in private equity or private placements; the underlying IRA owner must qualify as an accredited investor.

Accredited Investor Requirements:

  • Annual income exceeding $200,000 (or $300,000 joint income) for the previous two years and the expectation to earn an equal or higher income in the current year
  • Net worth exceeding $1M (individually or jointly)
  • General partner, executive officer, or director for the company issuing unregistered securities
  • An entity qualifies if it is a private business development company or organization with $5M in assets or more
  • An entity qualifies if its owners are accredited investors – however, an organization cannot be formed with purchasing specific securities as its sole purpose

Accredited Investor Requirement Amendments – Effective October 25, 2020:

  • Natural individuals with professional certifications, designations, or credentials designated by the SEC Commission and issued by an accredited educational institution (professional certifications include individuals in good standing of the Series 7, Series 65, and Series 82 licenses)
  • Spousal equivalents, opening the option to pool assets to qualify as accredited investors
  • Natural persons who are knowledgeable employees of a private fund
  • Entities with at least $5M in assets with SEC and state-registered investment advisors, exempt reporting advisers, and rural business investment companies (RBICs)
  • Entities that own investments as defined in Rule 2a51-1(b) under the Investment Company Act with $5M or more in assets not formed for the sole purpose of investing in securities offered
  • Family offices that have at least $5M in assets under management and family clients (each term is defined under the Investment Advisers Act)
Prohibited Transactions Guide cover

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Disqualified parties 2020

Disqualified Persons

  • The IRA holder and his/her spouse
  • The IRA holder’s lineal descendants, ascendants, and their spouses
  • Investment advisors and managers
  • Corporations, trusts, partnerships, or estates in which the IRA holder owns a 50 percent or greater interest
  • Anyone providing services to the IRA, such as the trustee or custodian

Prohibited Investment Types

Your self directed IRA may NOT invest in life insurance products or collectibles. Examples of collectibles include works of art, rugs, antiques, and alcoholic beverages. Your IRA may invest in precious metals, but the metals must be approved. Approved metals must meet certain fineness requirements.

2021 Important Dates

April 15, 2021 – Deadline to open and fund traditional and Roth IRAs, ESAs, and HSAs for your contribution to be deductible on your 2020 tax return filed by April 15, 2021.

Note: SEP IRAs must be opened and funded by tax filing date, including extensions

Resource: https://www.1040.com/tax-guide/irs-tax-dates/

Additional Resources

IRS Publication 590 – Individual Retirement Arrangements (IRAs)
Internal Revenue Code 4975 – Disqualified Persons
SEC Alert: Self Directed IRAs and the Risk of Fraud
Contribution Limits