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Disqualified Transactions inside of an IRA

Disqualified transactions inside an IRA
One of the greatest things about a self-directed IRA is that it gives you the ability to invest in non-traditional investments that are not allowed in regular IRAs. With that, you need to know what type of investments/transactions are not allowed.

The IRS has outlined three things that are disqualified inside of a self-directed IRA.  They are:

1.     Life Insurance policies- You cannot take out a life insurance policy on yourself inside of an IRA.

2.    Collectibles – This includes stamps, coins, artwork, guns, cars, and any other asset that could be deemed a collectible.  Note:  The IRS does allow gold and silver as long as it meets certain criteria.  To learn more about what type of gold is allowed in an IRA check out FAQ About Precious Metals IRAs Including Gold & Silver IRAs

3.    No interactions with related parties- These type of transactions are the most difficult to consult on because there are so many different items to consider when you transact with related parties.  I would always suggest speaking with an attorney if you have a specific case involving related parties.
So what is a related party? What makes someone a disqualified person? Each situation is unique and could mean a different answer but if the person falls into one of the six categories below they are a disqualified person.

Below are the categories of disqualified persons (per tax code section 4975(e)(2).)

1.    A person providing services to the IRA. In the case of the IRA owner is always a disqualified person, partly because of the services which the IRA owner provides.

2.    Fiduciaries are disqualified persons. This includes the position of manager of an IRA LLC that is set up. Tax code Section 4975(e)(3) provides a definition of fiduciaries

3.    A member of the family or anyone listed in sub-paragraphs 1 and 2 above, described as: Spouse, ancestors, direct descendants and spouses of these relatives. Note, however, that siblings and other relatives more distantly related to the IRA account owner are not considered as disqualified persons but may still be off-limits due to other prohibited transaction rules (conflict of interest, indirect benefit, etc).

4.    Corporations, partnerships, trusts or estates in which one of the above three categories of disqualified persons, either directly or indirectly, owns 50% or more of the stock or other beneficial interests in one of those entities.

5.    An officer, director (or someone holding similar powers and responsibilities), a 10 percent or more shareholder, or a highly compensated employee of one of the entities described in subparagraph 4 above. (Highly compensated means an employee earning 10 percent or more of the yearly wages of one of the entities described in subparagraph 4 above.)

6.    A partner or joint venture of one of the entities described in subparagraph 4 above, who or which earns 10 percent or more of the capital or profits of that entity.

If you have any more questions about the rules associated with self-directed IRAs feel free to call, email or comment below.

Author: , Self-Directed IRA Professional