Avoid Prohibited SDIRA Transactions
Taking control of your retirement may seem like a daunting task, especially when you are the one in charge of your future. If you are looking into setting up a self-directed IRA fund for your retirement, there are many ways your plan can end up in a disqualified account.
Not to worry! If you perform your due diligence and follow IRS guidelines, you can easily avoid any prohibited transactions and build a solid nest egg for your future.
Before getting started, be sure you have selected an IRA custodian to oversee your account, as per the IRS. Choosing the right custodian could help you avoid any unwanted government entanglements. Following the guidelines and avoiding the following prohibited transactions can assure long-term retirement benefits for you and your family.
While setting up your SDIRA assets, be sure to avoid self-dealing. Account holders cannot benefit immediately or directly from any account investments. Additionally, you cannot benefit before your reach retirement age at risk of penalty or disqualification of the account. For instance, if you were to invest your IRA into a business, you cannot be the lead shareholder or the owner. Any action where the account holder can benefit immediately from any IRA deals can result in a tax penalty or the immediate disqualification of the account. This is not limited to business investments. It’s best practice to be sure any SDIRA dealings remain separate from your everyday life.
Knowing Disqualified Individuals
In addition to self-dealing, there are certain individuals that cannot have any transactions involving your IRA account. These “disqualified individuals” are anyone who may stand to benefit from account in the future, or anyone who has been named a benefactor in the case of your passing. Any disqualified individual cannot benefit from the assets owned by your SDIRA, including using any rental properties, taking private loans, or owning company stakes. Often, these individuals include a spouse, an ancestor, or lineal descendants. This list includes but is not limited to the following family members: grandparents, parents, spouse, children and their spouses, and grandchildren and their spouses.
Other disqualified individuals outside of the family are any individuals who may have a direct benefit from your SDIRA. This could mean trust members, IRA custodians, an account attorney, or other fiduciaries. Dealing with any of these individuals, even in a minimal way, could have a negative effect on your account.
Prohibited Investments and Assets
One of the benefits to opening a self-directed IRA is the option to partake in alternative assets. While real estate, precious metals, private lending and other investments could be beneficial for a well-rounded portfolio, the IRS has a list of assets that are not approved of. Using any of these in your portfolio could result in the ultimate disqualification of your account.
While there are certain approved precious metals, collectibles such as artwork, rugs, antiques, most metals, gems, stamps and coins are not considered viable assets in the eyes of the government. In addition, alcoholic beverages, life insurance and “tangible properties” are considered void assets as well. Though the government is open to many investment options, they remain clear about which you cannot partake in.
Due Diligence in Setting Up Assets
A common pitfall many account holders fall into is easily avoidable. When you set up your assets, take care to only use your IRA to fund your venture. Any personal use of funds could be considered a conflict of interest. For example, a rental property must be upkept using funds from your IRA, not your own pocket. Though it is an honest mistake, it’s one that could result in a tax penalty for your account. Should your IRA lack the funds to upkeep your properties, there are methods to use your personal funds. These transactions should take place with your IRA custodian after speaking with your financial advisor. It’s also important to report the fair market values of your assets yearly to avoid any IRS issues.
In keeping with rental property, any property purchased with your SDIRA cannot be used for personal benefit. Should you choose to buy up office space, a home, or any rental property, you and any disqualified individuals cannot use it. In addition, you cannot personally sell property to your IRA, or use any assets as security for a loan. Like with any property owned by your IRA, any private lending cannot take place with an account holder or disqualified individual. As you build your retirement account, be sure to perform your due diligence to avoid any of these missteps.
Planning, Investing and Retirement
Setting up your SDIRA the right way is the best path to assure a comfortable livelihood in your golden years. All it takes is a solid, well-advised plan, steady income and strong assets in a well-rounded portfolio. As you plan for your future, be sure to follow all IRS rules to avoid any complications. Avoiding prohibited transactions is crucial to a successful, penalty-free retirement fund. As always, seek a trust that provides investment advice to assure that all the IRS guidelines are followed. Secure your future by doing your due diligence and be the master of your retirement plan.