- Prohibited Holdings
- Prohibited Transactions and Disqualified Persons
- Consequences for Prohibited Transactions
IRS Rules for Self-Directed IRAs: Investment Restrictions, Disqualified Persons and Prohibited Transactions
Self-directed IRAs and other plans provide a great deal of freedom, flexibility, and choice of alternative investments. They are also governed by a set of self-directed IRA rules that self-directed investors must be aware of and follow.
The self-directed IRA are outlined and explained in detail in IRC 4975.
There are two types of limitations in regards to IRA investments: restrictions on the types of investments that can be held in an IRA, and certain transactions that are prohibited.
Fortunately, these restrictions are minimal. The Internal Revenue Code Section 4975 permits you to invest your IRA into any type of asset other than life insurance and collectibles, such as art work, antiques, stamps, etc. Prohibited transactions governed by IRC 4975 include any transaction between your IRA and yourself or other disqualified persons, or any disqualified person receiving a current benefit from the assets in your IRA.
Most people have been conditioned to equating saving for retirement with investing in the stock market. This is a result of most IRA custodians (banks, brokerage firms) limiting investment options to these traditional stock market-based investments. Fortunately, the IRS rules are much less restrictive and allow many alternative investments.
Instead of creating a long list of every possible investment, the IRS made a short list of prohibited holdings. Your self-directed IRA may NOT invest in collectibles or life insurance contracts. Any other type of alternative investment, including real estate, mortgage loans, private placements, and LLCs are permitted, as long as your IRA custodian allows these types of investments.
Prohibited Transactions and Disqualified Persons
Along with the great tax benefits, IRAs come with some self-directed IRA rules designed to prevent the inappropriate use of retirement funds prior to retirement. You are not permitted to receive any current personal benefit from the assets in your IRA. So, if your IRA owns a rental condo on the beach, you are NOT permitted to use or stay in that property. You are also not permitted to conduct any transactions between yourself and your IRA. For example, if you own a piece of real estate personally, you are NOT permitted to sell that property to your IRA or to personally buy a property from your IRA. These same restrictions apply to certain family members and others defined as “Disqualified Persons.” It is critical to understand who these people are.
- The IRA holder and his or her spouse
- The IRA holder’s lineal descendants (children, grandchildren, etc.) and their spouses
- The IRA holders lineal ascendants (parents, grandparents, etc.)
- Investment advisers, managers, and fiduciaries
- Any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest
- Anyone providing services to the IRA