Understanding IRS rules to make the most of your IRA
A self-directed IRA gives you more investment options and flexibility than many other retirement accounts. However, the IRS does prohibit certain investment types and transactions and restricts the ways you can use your investments. At PENSCO, we pride ourselves on our knowledge of IRS rules, and as your self-directed IRA custodian we want to make sure that you are aware of these rules and regulations so you can maintain the tax-advantaged status of your account.
Conducting any prohibited transaction, even unintentionally, will result in your account losing its qualified tax-protected IRA status. You will have to pay taxes plus additional penalties.
Keep in mind, your IRA retirement plan can't conduct transactions which benefit you, your beneficiaries or other disqualified persons, or your business. This is called "self-dealing" and it is not allowed.
Some common transactions prohibited in a self-directed IRA:
- You can't hold real estate or property that you or other disqualified persons live in, plan to live in or use in any way while that property is held in your retirement account.
- You can’t purchase private equity shares of your own business (or that of any other disqualified person).
- You can't loan money to yourself or other disqualified persons from your IRA or other tax-advantaged retirement account.
- You can't make "stepped transactions," that is, a series of transactions that circumvent tax laws on purpose or accidentally. For example, you can't loan money from your IRA to your brother (who's not a disqualified person), who then loans that money to his wife, who then loans it to you.
- At PENSCO you cannot invest in:
- Collectibles, such as art, antiques, stamps, gems, rugs or anything else the U.S. Treasury Department deems to be a collectible
- Life insurance
- The stock of a Sub-Chapter S Corporation (Solo(k) plans can invest in an S Corporation.)
- Viatical settlements (sales of life insurance policies to a third party)
- General partnerships
This isn’t a complete list.
If you’re interested in investing in something which might fall under one of these restrictions, PENSCO will review your deal to ensure it is compliant.
Understand the concept of disqualified persons
The same rules that apply to you and your IRA also apply to "disqualified persons." These include your parents, grandparents, children and grandchildren, plus their spouses and your fiduciary.
The IRS defines a fiduciary as anyone who:
- Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets
- Provides investment advice to your IRA for a fee or has any authority or responsibility to do so
- Has any discretionary authority or discretionary responsibility in administering your IRA
Considered Disqualified Parties:
- Children/Adopted Children and their Spouses
- Grandchildren and their Spouses
- A Fiduciary (see definition above)
- A person providing services to the plan, such as an CPA or Attorney
- Companies owned by disqualified parties
Not Considered Disqualified Parties:
- Step Grandparents
- Step Parents
- Spouses's Parents
- Aunts, Uncles, & Cousins
- Siblings/Step Siblings
- Step Children & their Spouses
Review important IRS documents for more details
The information provided here is for general information purposes only. PENSCO does not provide tax advice and IRS rules may change on short notice. When investing through any retirement account, you should consult a tax specialist or review the official IRS publications at www.irs.gov to make sure you are making the best decisions you can for your specific situation based on the most up-to-date information possible.
These IRS documents can help you understand your opportunities and obligations: