SETTING UPSelf-Directed IRA Prohibited Actions:
Rules & Regulations

An SDIRA, or self-directed individual retirement account is held by a custodian, where YOU choose YOUR investment, from a wide variety of alternative assets, that aren’t available to you in a “traditional” IRA. A SDIRA is a personal savings account for you retirement savings that provides tax-deferred or tax-free savings.

Prohibited Asset Types

IRS regulations prohibit IRA investments in life insurance and in collectables such as artwork, rugs, antiques, metals (there are exceptions for certain kinds of bullion), gems, stamps, coins (there are exceptions for certain coins minted by the U.S. Treasury), alcoholic beverages, certain other tangible personal property and S-Corporations.

Prohibited Transactions

IRS regulations prohibit transactions that are an improper use of the value in the account or annuity by the account owner, the account owner’s beneficiary, or any other disqualified person. These rules are generally designed to prevent self-dealing. Disqualified persons include your fiduciary and members of your family, such your spouse, ancestor, lineal descendant (e.g. children), and any spouse of a lineal descendant. In addition, other disqualified persons include:

• Service providers of the IRA (e.g., 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 or held by a fiduciary or service provider;
• An entity that is a 10% or more partner or a joint venture with an entity that is 50% or more owned directly or indirectly or held by a fiduciary or service provider;
• Additionally, in the case of a SEP or SIMPLE IRA:
  • The Employer
  • 50% or more owner of the Employer
  • Officers, directors, 10% or more shareholders, and highly compensated employees of the Employer
  • An entity 50% or more owned by the Employer
  • 10% or more partner or joint venture of the Employer

The following are prohibited transactions with an IRA:

• Borrowing money from it
• Selling property to it
• Receiving unreasonable compensation for managing it
• Using it as security for a loan
• Buying property for personal use (present or future) with IRA funds

If the account owner or beneficiary is engaged in a prohibited transaction, the account is treated as a distribution and all assets will be distributed at their fair market values on the first day of the year in which the transaction occurred. The distribution would be subject to any taxes or penalties associated with an early distribution. Generally, a 10% early withdrawal penalty and treatment of the distribution as ordinary income for the purposes of income taxes may be levied.

Examples of self-dealing include:

• Having your IRA purchase real estate that you own or use
• Having your IRA purchase real estate that is owned by a family member of lineal descent, such as your father
• Lending money to a disqualified person
• Granting a child a second mortgage for the down payment on his or her first home
• Buying stock from the account owner involving IRA funds and a disqualified person
• Purchasing stock in a closely held corporation in which the account owner has a controlling equity position
• Purchasing restricted stock from a family member who is a disqualified person listed above