To put it simply, if you’re found to be in violation of these self-directed IRA rules, it could lead to your IRA losing its tax-deferred status, disqualification, and in turn, serious tax penalties. So, to steer clear of any trouble, here are a couple of the biggest rules to remember.
Self-dealing can easily be looked over if you don't know enough about the rules to investing with your self-directed IRA or 401K. To understand self-dealing better, you must first understand what a self-directed IRA is, and how a basic retirement account works. Retirement accounts are designed to benefit the owner of the account upon retirement and no other time before then. Knowing the purpose of retirement accounts you can better understand what self-dealing is.
Self-dealing is when an IRA transaction is done that brings personal gain to the account owner. Remember, the account owner cannot receive any personal gain with retirement accounts until retirement. If so, you could be subject to taxes and other penalties. Check out our self-dealing article for more info.
The IRS has made it clear that they do not want you to receive or give a direct or indirect benefit from your IRA. An indirect benefit is the same thing as self-dealing, and many times the word usage is used interchangeably and means the same thing. Making sure you know about both phrases is important because you never know what phrase will be used. An indirect benefit that you could receive from your IRA could be living in the property that your IRA owns, or receiving a salary from the management of your IRA assets. For more examples of what could be considered an indirect benefit/self-dealing check out our article pertaining to indirect benefits.
Self-Directed IRA Investments Not Allowed
There are plenty of other self-directed IRA rules to be aware of when investing and dealing with your IRA. The IRS has outlined three investment types and rules that are disqualified inside of an IRA. They are:
- Life Insurance policies
- Transactions with related parties (disqualified persons)
These three types of self-directed IRA investments are considered disqualified transactions, but what does each section actually consist of? What exactly qualifies as a collectible, and who qualifies as a disqualified person? Learn more on our Disqualified Transactions article from our blog.
One basic rule to IRA investing that you need to be aware of pertains to disqualified persons. In regards to disqualified persons, you cannot lend money to them through your IRA, invest in their businesses through your IRA, or let them live in a real estate property that you purchased through your IRA. For a more in-depth look at how the IRS describes a disqualified persons check out our article on Disqualified Persons, and the infographic below.
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