What is a prohibited transaction?
While your self-directed IRA account offers considerable freedom and a wide array of alternative allowable investments, it's important to note that, despite its flexibility, there are certain limitations to consider.
Self-directed IRAs must adhere to Internal Revenue Service (IRS) rules to maintain their pre-tax or tax-deferred status and avoid penalties. Some self-directed transactions may jeopardize your IRA's intent and lead to risks and penalties, particularly those perceived as providing immediate personal financial gain to you or disqualified persons. The IRS explicitly defines these prohibited transactions in Internal Revenue Code (IRC) 4975.
It is crucial to be aware of the rules and regulations governing self-directed IRAs and to consult with a qualified tax professional or financial advisor before making any investment decisions within yourself-directed IRA.
Examples of transactions that IRA owners are prohibited to engage in:
- Borrow money from the IRA
- Buy property for your personal use (present or future) with IRA money
- Sell, exchange, or lease property you already own to the IRA as an investment
- Receive personal income from rental property the IRA owns
- Lend IRA money to disqualified persons
- Supply goods, services or facilities to disqualified persons
- Transfer IRA income or assets to disqualified persons
- Allow disqualified persons to obtain or use IRA income or investment(s) for their own interest
- Use the IRA as security for a loan
Who is considered a disqualified person?
When identifying prohibited transactions within your self-directed IRA, the following individuals are classified as disqualified persons:
- You and your spouse
- Your lineal descendants (children, grandchildren), ascendants (parents, grandparents) and their spouses
- A beneficiary of the IRA
- Your employer
- Anyone providing services to the IRA, such as the trustee or custodian
- Investment advisors and managers
- Any corporation, partnership, trust, or estate that you have at least a 50% stake in
Are there any prohibited investments?
Although self-directed IRAs provide a diverse array of allowable investments, certain restrictions apply to specific investments. The IRS identifies the following investment types as prohibited within your self-directed IRA:
- Life insurance contracts
- Sub-Chapter S Corporations
- Collectibles. The IRS defines collectibles as: Alcoholic beverages, antiques, artworks, coins (except US Minted Gold or Silver Eagle coins), rugs, stamps, certain other tangible personal property.
