A self-directed IRA gives you more investment options and flexibility than many other retirement accounts. However, the IRS does prohibit certain transactions and investment types, and restricts the ways in which you can use your investments.

Conducting any prohibited transaction, even unintentionally, will cause your account to lose its qualified tax-protected IRA status. As a result, account owners will be liable for taxes, plus additional penalties that may apply.

Self-Dealing - Prohibited Transaction

Any investment transaction providing personal financial gain to an IRA account owner or a disqualified person to the IRA account owner directly or indirectly is considered “self-dealing,” which is a prohibited transaction.

A few examples of self-dealing transactions may include:

  • Using the IRA as security for a personal loan
  • Transferring retirement account income or assets to a disqualified person
  • Lending IRA money to disqualified persons
  • Extending credit based on the IRA to disqualified persons
  • Furnishing goods, services, or facilities to disqualified persons
  • Allowing fiduciaries to obtain or use the plan’s income or assets for their own interest

Disqualified Individuals - Prohibited Transaction

Disqualified persons are individuals or entities between whom or which an IRA is prohibited from engaging in any direct or indirect sale or exchange or leasing of any property; lending of money or other extension of credit; furnishing goods, services or facilities; or transferring to or permitting the use of IRA income or assets.

  • Fiduciaries (which in the case of a self-directed IRA includes you, as the IRA owner)
  • IRA owners’ lineal descendants, ascendants, and their spouses (see diagram below)
  • Service providers of the IRA (IRA custodian, CPA, financial planner)
  • An entity (such as a corporation, partnership, limited liability company, trust or estate) of which 50% or more is owned directly or indirectly by disqualified persons or held by a fiduciary or service provider; also a partner which holds 10% of a joint venture of such entity.
  • See IRS section 4975 for a complete list of prohibited parties

Indirect Benefit Rules - Prohibited Transaction

The purpose of the IRA is to provide for your retirement in the future. It is considered an “indirect benefit” if your IRA is engaged in transactions that, in some way, can benefit you personally today.

The following are just a few types of indirect benefit transactions that are NOT allowed in an IRA:

  • Personally using property held in the IRA. Using real estate purchased through your IRA as an office, personal residence, vacation home or retirement home.
  • Receiving personal benefits from your IRA. Lending yourself money from your IRA or paying yourself, or a company that you own, to do work on a home purchased by your IRA
  • Using your IRA funds to buy a vacation home that you or your family will use.

This information is presented for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and accounting professionals.

Disqualified Investments - Prohibited Transaction

The IRS does not provide guidance on what is permitted, but dictates only what is NOT permitted, which includes:

  • Collectibles (such as artwork, stamps, rugs, antiques, gems, and alcohol)
  • Certain Coins (except certain U.S.-minted coins)
  • Life Insurance

Investment Related Expenses & Fees - Prohibited Transaction

Regarding investments directed by your IRA account, the IRS prohibits the use of personal non-qualified funds to pay for expenses and/or fees incurred by the investment asset or the affiliated investment company (if applicable). This would be considered a “self-dealing” transaction, providing personal financial gain to the IRA account owner. All investment related fees must be paid with qualified funds directly from the IRA account.

Examples of Investment Related Services (not an all-inclusive list):

  • Precious Metal Investments – Depository Fees must be paid by the IRA.
  • Digital Currency Investments – The Digital Currency Account Set-up Fee and Annual Depository Fee must be paid by the IRA.
  • Rental Property Investments – Any expense related to the property must be paid by the IRA (i.e., insurance, property taxes, maintenance, management, etc.).
  • IRA LLC – The administration costs associated with the IRA LLC must be paid by the IRA LLC or the IRA (i.e., initial filing, annual registration, retitling, etc.).

If there are sufficient funds available in the cash balance of the IRA account, the investment related fees (annual and/or transactional fees) will automatically be deducted from the IRA cash balance, unless informed otherwise. If you would like to “reimburse” your IRA account for the investment related expenses or fees, it will be classified as a contribution. A contribution can be made up to the annual maximum amount (i.e., Roth or Traditional IRA limit of $6,000 for 2022) to replace the amount taken for the fee and will be recorded on your tax documents at the end of the year.

To learn more about the difference between Investment related fees and Custodial Administrative fees, CLICK HERE.