IRA Prohibited Transactions Rules

There tends to be a lot of confusion when it comes to the types of investments that are allowed in a self directed IRA. The truth be known, the IRS doesn’t really care much about what you invest in, however, so long as you stay away from their prohibited transactions list. They state exactly what isn’t allowed in Internal Revenue Code Sections 408 & 4975. These are known as prohibited transactions and the purpose of these rules is to ensure that IRAs are used for their intended purpose, which is to save up for retirement.

A self-directed IRA has been allowed to invest in so-called alternative investments such as real estate, precious metals, tax liens and one can even do so without permission from a custodian. However, one has to make sure to use the services of a professional that is very familiar with the prohibited transaction and disqualified persons guidelines set by the IRS. You don’t want to make any mistakes here as the penalties imposed can be quite severe and are definitely not worth putting the retirement you have worked so hard for at risk.

There is no point in trying to memorize all the prohibited transactions or go it alone. Although many of the rules are straightforward, there are a number of them that may not be so clear cut, especially when you are working to structure an alternative investment transaction. Also, the rules can change from time to time so you will want to bookmark this blog in order to keep you up to date with anything new that may emerge. The best plan of action is to seek a professional and confirm that what you want to invest in does not violate any of the IRA rules.

Here are some common-sense guidelines that are worth knowing so you don’t go into self directed investing totally unarmed:

  1. Make sure you only use retirement funds in the transaction unless you have the appropriate entities in place.
  2. The transaction should not involve any disqualified persons (check with a professional on the specifics).
  3. All income or gains need to return back to the self directed IRA.
  4. Only funds from the IRA itself can be used to pay for costs or expenses related to the IRA investment.
  5. No disqualified person can provide services to, or receive compensation from a self directed IRA, directly or indirectly.
  6. Precious metals being bought with IRA funds need to be held in a US bank.

Note this is just an overview. This list is not exhaustive. Check some of our other posts to learn more.

While self directed IRA investments are designed to provide freedom and flexibility, they are most definitely governed by a strict set of rules. Make sure you play by them to avoid any negative complications.

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