Creating a Self-Directed Individual Retirement Account (IRA) offers investors a greater degree of control and as result, you have a wider range of investment options compared to traditional IRAs. However, it’s crucial for investors to be aware of the restrictions imposed by the Internal Revenue Service (IRS). Be aware of these restrictions to avoid penalties or disqualification of the IRA. This article discusses what is not allowed in a Self-Directed IRA, referencing the guidelines provided in IRS Publication 590.
No Life Insurance and Collectibles
According to IRS Publication 590, a Self-Directed IRA cannot invest in life insurance contracts and most collectibles. This includes items like artwork, antiques, metals (with certain exceptions for specific kinds of bullion), gems, stamps, coins (except certain U.S. minted coins), alcoholic beverages, and certain other tangible personal property.
Prohibited Transactions and Parties
The IRS strictly prohibits certain types of transactions in a Self-Directed IRA. These include:
– Self-Dealing: You cannot use your IRA funds to benefit yourself or your beneficiaries before retirement. For example, you cannot buy property for personal use with your IRA funds.
– Sale or Lease to Disqualified Persons: You cannot sell, lease, or exchange property between your IRA and disqualified persons. Disqualified persons include the IRA owner, their spouse, ancestors, lineal descendants, and any spouse of a lineal descendant.
– Borrowing Money or Providing Goods and Services: An IRA cannot borrow money from or lend money to disqualified persons. Also, it cannot engage in transactions where goods, services, or facilities are furnished to a disqualified person. An IRA can only take on a Non-Recourse Loan and not a typical mortgage.
Indirect Benefits
Any transaction that indirectly benefits a disqualified person is not allowed. For example, an IRA cannot invest in a business that a disqualified person has a substantial interest in.
Prohibited Investments
Beyond life insurance and collectibles, certain other investments might be prohibited based on the custodian’s policies or specific regulations. These can include speculative investments like certain types of derivatives or complex financial instruments.
Real Estate Restrictions
While real estate can be included in a Self-Directed IRA, there are restrictions:
– Personal Use: Neither you nor any disqualified person can use the property for personal purposes.
– Unrelated Business Income Tax (UBIT): If your IRA earns income from debt-financed properties or runs a business, it might be subject to UBIT.
Custodian Approval
All investments in a Self-Directed IRA must be approved by the IRA custodian. The custodian does not act as an investment advisor. They ensure that the investments comply with their guidelines for assets they wish to custody.
Conclusion
Investors should approach Self-Directed IRAs with a clear understanding of these restrictions. While these accounts offer flexibility, they also come with the responsibility to adhere strictly to IRS guidelines to avoid penalties. It’s advisable to consult with a financial advisor or tax professional who is knowledgeable about Self-Directed IRAs to ensure compliance.
For more detailed information, investors should refer to IRS Publication 590, which outlines the rules and regulations governing IRAs. Reach out to us with your questions at info@uDirectIRA.com.
