Prohibited Transactions

Rules of Thumb for Avoiding Self-Directed IRA Prohibited Transactions

The Self-Directed IRA is a brilliant way for many investors to broaden their retirement investing horizons. It allows investors to put money aside for retirement while investing in nontraditional retirement asset classes, such as real estate and precious metals. But this expanded freedom does not mean that your retirement investing freedom will be unlimited. The IRS still wants to be sure that retirement accounts are used for valid retirement investing reasons—and as such, there are some ground rules.

In this post, we will explore some rules of thumb to help you both understand prohibited transactions within an IRA, as well as avoiding them in the future.

Rule of Thumb: Learn Your Non-Valid Retirement Assets

You might buy something with the hope of getting value from it in retirement. But when it comes to holding certain assets within a retirement account, you cannot do it. That list includes:

  • Life insurance
  • Certain kinds of precious metals
  • Art
  • Alcoholic beverages
  • Collectibles

You also cannot use a Self-Directed IRA or any assets within it to serve as collateral for a loan. Keep in mind that you can buy your own life insurance, buy your own precious metals, art, and more—but for these specific cases, you will want to keep them out of your retirement account.

Rule of Thumb: Do No Transact with People You Know

One of the most powerful ways to avoid prohibited transactions is to ensure that you never use your IRA to transact with someone you know. There is a broad term known as “disqualified persons” that the IRS uses here. Disqualified persons can be a lot of people, including a spouse or family member, a business partner, and more. Essentially, the rule of thumb is to avoid entangling your Self-Directed IRA with any personal benefits you might receive from these transactions.

Yes, it is true that you will “personally” benefit down the line when you use your retirement benefits. But that is the purpose of the account: to keep your retirement accounts separate from your short-term personal benefits. Understanding this key distinction is at the heart of what separates a retirement account from a personal, taxable account.

A clear example of a prohibited transaction with a disqualified person is an investor who purchases a piece of real estate within an IRA and then rents said real estate to someone they know. For example, if they rented out a single-family house (within an IRA) to a son or daughter, this would then give their family immediate personal benefit, and would be a prohibited transaction.

Rule of Thumb: Defer to the IRS Rules

There is no doubt that an investor with a Self-Directed IRA can have a bit of an independent streak. But if there is one thing you do not want to stray from, it is the IRS retirement investing rules! The IRS establishes very clear rules on using retirement assets the proper way, and before you make any major decisions yourself, you will want to stay up to date on those rules. You can do that by consulting the IRS website, of course. However, this can get quite complicated.

Another good way to ensure that you stay within the bounds of the rules is to work with a Self-Directed IRA administration firm with a solid reputation. Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.