Prohibitions when Investing with your Self Directed IRA

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Self-directed IRAs have become quite popular with Americans these days with the decline in the stock market. What it gives the account owners is more control over their assets and flexibility to invest in several viable options. Owners can invest their retirement funds in alternative IRA assets such as privately held businesses, real estate, precious metals etc.

Difficult economic times have spurred non-traditional methods to save for retirement, and many people are using a self-directed IRA to purchase non-traded assets like real estate. Fox Business {May 8, 2012}

Investors are seeing self-directed IRAs as a way of diversifying accounts. Instead of relying on pensions and 401(k)s, investors are looking at the alternatives that go into self-directed IRAs as a way of protecting against failures of mutual funds and other financial institutions. Guardian Liberty Voice {August 20, 2014}

In all the excitement of gaining benefits from your self directed IRAs, it is important to remember that with self directed IRA funds, certain investments and transactions are prohibited. The failure to do so may result in the loss of tax-deferred status of your account and invite taxes as well as heavy penalties.

The prohibited transactions and investments are as follows:

  • Antique furniture, porcelain, antique silver ware, vintage wine, works of art, vintage toys, stamps, comics, baseball cards, gems and jewelry.
  • Insurance contracts as a general rule, including universal, whole life, term policies of any value for IRAs, SEP and simple plans are disqualified. However, there is an exception to this rule for qualified plans – the incidental benefit rule.
  • Ownership of stocks in S Corporations is not allowed for IRA due to shareholder restrictions.
  • Most gold coins and those made of precious metals are prohibited other than a few exceptions like American Gold Buffalo coins (non-proof), American Silver Eagle (proof and non-proof), Canadian Maple Leaf coins, American Eagle coins (proof and non proof) and Austrian Gold Philharmonics coins. The mineral content of the coins must be very pure to be allowed inside an IRA. The coins should not be viewed as collectibles.
  • While holding real estate inside an IRA, the owner should not benefit directly from the property, such as receiving rental income or living in the property.
  • When discussing prohibited transactions, the Internal Revenue Code section 4975 identifies disqualified persons with whom interactions with the IRA are disallowed. The disqualified persons include the account holder, spouse, children and grandchildren, parents and grandparents, spouses of such people, account fiduciaries, trustees, investment managers, and business entity where the account holder has a minimum of 50% ownership.
  • The direct or indirect sale, exchange, or leasing of property between an IRA and a ‘disqualified person’ is prohibited.
  • Lending of money (direct or indirect) or other extension of credit between an IRA and a “disqualified person” is prohibited
  • Between a plan and disqualified person, furnishing of goods, services or facilities are prohibited. This would include receipt of unreasonable compensation by disqualified persons for managing property or assets held by the IRA.
  • The IRA funds cannot be used as security against a loan.
  • Account fiduciaries are disallowed to borrow, use or obtain against account assets for personal gain.

Despite this seemingly large list of prohibited investments and transactions that cannot involve your self-directed IRA, a wide range of investment options are permitted to help you leverage the income earning capacity of your retirement funds. It is advisable to consult your financial/retirement advisor for more information on the options available without inviting penalties and tax implications. People interested in taking possession of their 401(k) and making their investments more profitable would do well to take the advice of an experienced financial consultant to avoid problems at a later stage.

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