Self-directed IRAs make it easy for you to build retirement wealth by allowing you to invest in things you personally know and understand. Many individuals have had success self-directing their retirement plans by acquiring alternative investments in real estate, private lending opportunities, oil and gas options, and much more.
The comfort and ease of investing in what you know best also comes with the fact that you have to clearly understand the rules that govern retirement plans. There are specific prohibited transactions you cannot perform, as well as disqualified persons you’re unable to work with in regards to your IRA. Non-compliance of these IRS regulations can cause heavy penalties, taxation, and even disqualification of your tax-sheltered account.
The following is a short list of some common transactions that are not permissible in your self-directed IRA or 401(k).
- Your IRA may not buy from or sell property to you or another disqualified person. For example, your IRA can’t purchase a home you own or sell an asset such as a rental property to your mother.
- You and other disqualified persons are prohibited from leasing your IRA-owned property. This means if your IRA owns a vacation home, you and any other disqualified party are unable to use it for any purpose.
- You may not personally pay for expenses your IRA incurs. All expenses must flow directly out of IRA funds.
- You are unable to personally receive income, such as rent payments, derived by your IRA. All income must be deposited directly into your IRA account.
- Your IRA is not allowed to hold collectibles (stamps, works of art, antiques, etc.) or life insurance contracts as assets.
- Your IRA may not lend money to a disqualified person.
Who is considered a disqualified person?
Disqualified persons include the IRA holder and his or her spouse, the IRA holder’s lineal ascendants (parents, grandparents, etc.) and descendants (children, grandchildren, etc.), and anyone providing service to the IRA (including investment advisers, managers, and fiduciaries). Additionally, entities (such as corporations, partnerships, trusts, and estates) in which disqualified persons hold a 50 percent or greater interest are unable to transact with your self-directed IRA.
Note that disqualified persons do not include your sister, brother, or aunts, uncles, cousins, step-family, and so forth. However, to ensure that you steer clear of any inappropriate actions within your self-directed IRA you should always consult your CPA or financial professional for clear advice.
For more information regarding this topic, please visit the Prohibited Transactions & Disqualified Persons page of our web site.
If you have questions about this article or wish to learn more about self-directed accounts and alternative investments, please contact us.