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Self-Directed IRA Rules

A self-directed IRA offers investment opportunities outside of the typical stocks, bonds, and mutual funds. Real estate, promissory notes, and private company stock are some of the alternative investment options available when you own a self-directed IRA. To make the most of your investment and maintain your IRA tax benefits, it’s important for self-directed IRA owners to understand the rules and regulations that govern self-directed IRAs.

What Law Governs Self-Directed IRAs?

IRAs are governed by the Internal Revenue Code of 1986. Separate sections of the Code establish the requirements for traditional IRAs and Roth IRAs.  Regulations issued under each section contain additional details and rules, and the IRS has issued publications to provide more guidance on IRAs. Section 4975 of the Code contains the rules on certain transactions involving IRAs that are prohibited due to the potential for self-dealing.

With respect to self-directed IRAs, the laws and regulations provide standards that level the playing field for investors and ensure everyone utilizing alternative investments has the same advantages. To maintain the tax benefits of your retirement account, you need to follow the letter of the law which includes prohibited transactions, disqualified persons, and allowable investments.

What Self-Directed IRA Transactions are Prohibited?

Generally, the prohibited transaction rules are concerned with one thing: avoiding self-dealing. This means you cannot use the assets of an IRA to benefit a disqualified person (below).  For example, you can’t use your IRA to purchase a vacation property that you personally use, and you can’t buy property you currently own with your IRA.  While several transactions are prohibited, the Code and related guidance also contain exceptions for some transactions provided the requirements of the exception are met.  Code Section 4975 contains more information on prohibited transactions.

Who is a Disqualified Person in a Self-Directed IRA?

The Internal Revenue Code also outlines a list of disqualified people who may not personally benefit from the IRA’s assets or conduct certain transactions with the IRA. This list of persons includes, without limitation, the following:

  • Owner of the account
  • Fiduciaries
  • Investment advisors and other persons providing services to the IRA
  • Owner’s spouse
  • Ancestors of the account owner
  • Lineal descendants of the account owner
  • Spouses of lineal descendants of the account owner
  • A business entity majorly owned by certain disqualified persons (50% or more interest)

In the eyes of the law, having the self-directed IRA deal with these people is generally an act of self-dealing (unless an exception applies). Code Section 4975 contains more information on disqualified persons.

Learn More About Self-Directed IRAs

If you want to learn how a self-directed IRA could help you diversify your retirement portfolio, contact the professionals at iPlanGroup. We work with investors looking to grow their financial wealth with alternative investments so people like you can have the retirement they’ve always dreamed of. Ready to learn more? Contact us now for your free consultation.

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