The rules governing self-directed IRAs are set forth in the Internal Revenue Code (IRC), and the specific code governing IRA accounts is IRS Publication 590. Reading through the entire IRC is likely to put you to sleep, so here are the main things you need to know about self-directed IRA rules and regulations.
If you enter into a ‘Prohibited Transaction’ (which is simply the term used by the IRS to describe something you are not allowed to do) with your IRA account, you will be subject to very severe penalties.
What An IRA Cannot Invest In
The IRS has outlined a few things that you specifically cannot invest in with your IRA account:
- An IRA cannot invest in life insurance contracts
- An IRA cannot invest in collectables. What constitutes a collectable can be a bit of a grey area, but here are the guidelines provided by the IRS:
- Alcoholic Beverages
- Certain other tangible personal property
**Exception** – An IRA can invest in one, one-half, one-quarter or one-tenth ounce U.S. gold coins, or one ounce silver coins minted by Treasury Department. It can also invest in certain platinum coins, and certain gold, silver, palladium and platinum bullion.
In addition to the investments above which an IRA account is not allowed to make, there are also certain people and entities with whom IRAs are not allowed to interact. Here is a list of the individuals and organizations who are deemed ‘Disqualified’ by the IRS:
- The IRA owner or the spouse of the owner
- The IRA owner’s lineal descendants and ascendants
- An entity with combined ownership greater than 50% by a disqualified person(s)
- A 10% owner, officer, director or highly compensated employee of such entity
- A fiduciary of the IRA or person providing services to the IRA
Here are some examples of self-directed IRA investments that would be considered ‘Prohibited’ by the IRS:
- Investing in a home that you – or any of your lineal descendants/ascendants – plan to live in right now.
- Loaning money to your Father, Mother, son, daughter, etc.
- Personally guaranteeing a mortgage for your IRA (if you want to use leverage in your IRA, you must use a non-recourse loan)
- Paying yourself from proceeds generated from the IRA’s investments
Disqualified parties cannot personally benefit from your IRA’s investments, nor can they provide benefits directly to the IRA (i.e. making capital improvements on a rental property). If you are uncertain whether or not you are violating the self-directed IRA rules, and potentially committing a prohibited transaction, talk to your custodian and/or a qualified professional before making the investment.