A self-directed IRA is a type of retirement account that requires the owner to make his own investment decisions on behalf of the plan. The Internal Revenue Service (IRS) requires the assets in this type of IRA be held by a qualified trustee, also known as a custodian.
In general, the custodian is required to maintain all assets, transactions, and records on behalf of the account owner. In addition, the custodian ensures that clients understand the self-directed IRA rules that govern these retirement accounts. It is very important to follow these regulations because falling out of compliance can lead to significant tax implications.
There are many types of investments that the IRS allows in a self-directed IRA account. However, the agency also places limits on the assets that can be invested in these arrangements. To ensure you are in compliance with the law, you must be aware of the types of transactions that are prohibited by the IRS. This will allow you to make legal investments that will enhance your retirement and prevent you from the hassle and expense of tax penalties.
Transactions that are Prohibited by the Self-Directed IRA Rules:
One of the main goals of the IRS in establishing self-directed IRAs was to make sure that all investments made to these accounts are for the exclusive benefit of the retirement plan. In other words, the self-directed IRA rules were put in place to ensure you do not receive any immediate benefit from your investments. You must only benefit from these investments during your retirement years.
As such, there are several prohibited transactions that are carefully regulated by the IRS. These are:
- You cannot sell, lease or exchange any property between a disqualified person and the plan. This means, for instance, that you cannot sell property you currently own to the IRA.
- You cannot send money or offer credit to a disqualified person based on your IRA balance. This means that you are not able to guarantee a loan from your IRA for the purchase of real estate.
- You cannot furnish goods, facilities or services between an IRA and a disqualified person. In other words, you cannot use your personal furniture to furnish a rental property you have invested in your IRA.
- You cannot transfer the income or assets of your IRA for the benefit of the disqualified person. This means you cannot use your IRA funds to buy a vacation property for you or your family.
- You cannot loan the assets of your IRA to a disqualified person who has a financial interest in the account. For instance, you cannot loan money to your accountant.
- You cannot receive an income from the profits generated from an asset in the plan.
The IRS defines a disqualified person for the purposes of the prohibited transaction self-directed IRA rules as:
- The person who owns the IRA account (you)
- The IRA owner’s spouse
- Ancestors, including your mom, dad and grandparents
- Lineal descendants, including your son, daughter and grandchildren
- Spouses of lineal descendants, including your son-in-law or daughter-in-law
- Investment advisors
- Any business entity, including an LLC, corporation, partnership or trust in which any of the above-mentioned disqualified persons has at least a 50 percent interest.
The best part of a self-directed IRA is there are many investment options that can provide you with a nice retirement income. Real estate is one of the more popular investments, but precious metals, private company stock, tax liens, structured settlements and secured or unsecured notes are all viable options as well. Just be sure to follow the self-directed IRA rules so you don’t find yourself dealing with a huge tax bill instead of a huge retirement fund.
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