Self-Directed IRA Prohibited Transactions Made Simple

Self-Directed IRA Prohibited Transactions Made Simple

Prohibited Transactions Made Simple

Here at American IRA, we often get asked about what kind of prohibited transactions are allowed in a Self-Directed IRA. While there are some restrictions, there are still plenty of opportunities for retirement investors. It just helps to know what your limits are, and what they are not. The simple truth is, there is a lot of freedom with Self-Directed IRA investing available. But as is the case with many types of freedom, it also comes with the responsibility to know your limits.

For a Self-Directed IRA, those limits are prohibited transactions. And if you don’t know those limits, it can put you in danger of violating the rules and regulations of a retirement account, which in turn could expose you to taxes and penalties. Let’s take a look at what is and isn’t allowed.

What is a Prohibited Transaction?

A prohibited transaction is any transaction that would violate the IRS rules governing IRAs. These rules are designed to prevent self-dealing, meaning you cannot use your IRA to benefit yourself or your immediate family members.

A direct prohibited transaction is one that is entered into between the IRA and a disqualified person. A disqualified person includes the IRA owner, their spouse, parents, grandparents, descendants, and any fiduciary (someone who has control over the assets in the IRA).

Why are these prohibited transactions prohibited in the first place? It’s simple to understand: your retirement accounts need to be kept separate from your personal benefits. If you or someone you know personally benefits from a transaction with your retirement account, then that means the assets aren’t really retirement assets. They are assets you’re using in the here and now. For that reason, the government has the right to tax and penalize you for taking an early withdrawal. The purpose of retirement accounts is to keep those assets separate for long-term growth. This meaning you should be discouraged from using them in the meantime.

What Can You Do with a Self-Directed IRA?

This might sound like it severely limits your options with a Self-Directed IRA. However, you also need to consider all of the possibilities if you do use your Self-Directed IRA effectively.

A Self-Directed IRA offers investors a unique opportunity to invest in a wide variety of assets. Gold, silver, and other precious metals have long been coveted as a safe haven for investment dollars. A Self-Directed IRA offers investors the ability to add these assets to their retirement portfolio. For those looking for an alternative investment option, a Self-Directed IRA offers the perfect solution. The same logic extends to real estate, private companies, and even private notes. You can diversify your retirement account with all sorts of alternative asset classes—as long as you avoid prohibited transactions like renting a piece of real estate to a sibling, for example.

How to Avoid Prohibited Transactions

Avoid prohibited transactions like buying life insurance (not a valid retirement investment) within a Self-Directed IRA, and you’ll unlock all sorts of potential. But you can only do that when you understand what these limits are. And that requires understanding what a Self-Directed IRA can do for you—and what it can’t do for you because of the limits necessary to all retirement accounts.

There are still plenty of investing opportunities available for those with Self-Directed IRAs, despite the prohibited transactions rules set forth by the IRS. By understanding what is and isn’t allowed, you can make sure your retirement investing stays on track. To learn more about prohibited transactions and what’s possible with a Self-Directed IRA, reach out to us here at American IRA by dialing 866-7500-IRA.

Want some tips on how to avoid prohibited transactions? Visit: Tips for Avoiding Prohibited Transactions in a Self-Directed IRA (

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