Self directed retirement accounts provide a great deal of freedom, flexibility, and a wealth of investment choices. However, there are IRS rules for self directed IRAs 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.
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.
- 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
Potential Consequences of a Prohibited Transaction
Failure to follow the IRS’s prohibited transaction regulations may lead to costly consequences. This could also jeopardize the tax status of your plan. Suppose there is a prohibited transaction in an IRA account at any time during the year. In that case, the account stops being an IRA as of the first day of that year. The account is treated as having distributed all its assets to the IRA owner at the fair market value on the first day of that year. Consult with your tax or legal advisor about what may be deemed prohibited before engaging your IRA in any transaction.
- 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
The IRS does not provide a list of allowable investments for IRA accounts. But, the IRS does not allow investments in Life Insurance or Collectibles such as:
- Metals (certain Government minted gold/silver/palladium/platinum are permitted)
- Alcoholic beverages
Prohibited Transactions Guide
Self-directed IRAs provide a great deal of flexibility and freedom when it comes to investing. However, there are certain rules and guidelines that must be followed in order to maintain the tax-advantaged status of your retirement account. This Guide discusses the prohibited transactions, prohibited persons, and rules in self-directed IRA investing.