Breaking the rules can result in severe tax consequences. Whenever you are unsure of a transaction or situation, always consult with a tax or financial advisor before you act to get clarification. Here are the main rules that you should remember when engaging in a transaction with your self-directed account.
The IRA investor or his or her beneficiaries cannot engage in a transaction with a disqualified person. These persons are listed below. When you break this rule, your IRA is no longer an IRA and it loses its tax benefits.
The IRA investor cannot use the self-directed IRA for personal benefit. For example, rental income from an investment property owned by the IRA must be deposited in the IRA account and not in a personal account. All income from IRA assets must be put back in the IRA.
The IRA investor cannot invest in disallowed assets per IRS rules for retirement accounts. Disallowed IRA assets or investments are explained further below.
Disqualified Persons are people or entities that cannot do any direct or indirect deals, investments or transactions with the IRA.
The IRA cannot do business with:
Self-directed IRAs give you the freedom, flexibility, and choice of how to invest your hard-saved dollars. You can expand and diversify your investment opportunities beyond the stock market into a variety of alternative investments, such as mortgages, notes, real estate, and private placements.
These alternative investment options have been available since 1975, when IRAs were introduced as part of the Employee Retirement Income Security Act of 1974. However, there are some assets that are not allowed.
It comes as a surprise to many investors that there is no list of approved investments for retirement accounts. However, the IRS does have a list of what the law does not allow as an investment in a retirement account.
All IRAs including self-directed IRAs cannot invest in:
This includes any: work of art, rug or antiques, certain metals, gems, stamps and certain coins, alcoholic beverage, and any other tangible personal property that is a "collectible" under IRC Section 408.
Per the Internal Revenue Code 408 (a)(3) for an individual retirement account, an IRA cannot invest in life insurance.
Trusts that qualify as an IRA are not eligible to be shareholders of an S-Corporation. (See Revenue Ruling 92-73)
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 account 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.)
You cannot use your self-directed IRA to:
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