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.
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
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.