The IRS has strict rules about “prohibited transactions,” and violating these rules can lead to severe penalties, including disqualification of the IRA. Here are some of the key prohibited transactions that a IRA holder should be aware of:
1. **Self-Dealing:** The IRA holder or other disqualified persons cannot directly benefit from the IRA’s investments. For example, you can’t use your IRA to buy a vacation home that you plan to use.
2. **Direct or Indirect Personal Benefit:** You cannot receive any immediate benefit from an IRA investment. This extends to “indirect” benefits, too, such as guaranteeing a loan with IRA assets.
3. **Transactions with Disqualified Persons:** The IRA holder can’t engage in transactions with disqualified persons. Disqualified persons include the account holder, their spouse, ancestors (parents, grandparents, etc.), lineal descendants (children, grandchildren, etc.), and spouses of lineal descendants. Also included are investment advisors, trustees, and any business entity in which these persons have a 50% or greater interest.
4. **Borrowing Money from the IRA:** The IRA holder cannot borrow money from their IRA.
5. **Selling Property to the IRA:** You cannot sell property that you own to the IRA.
6. **Receiving Unreasonable Compensation for Managing the IRA:** If you’re managing the IRA yourself, you cannot receive unreasonable compensation for your services.
7. **Physical Possession of IRA Assets:** In the case of precious metal investments, you cannot take physical possession of the metals. They must be stored in a depository.
It’s important to note that these are general guidelines and there may be other specific rules depending on the type of investment. It’s advisable to consult with a tax advisor or a professional who specializes in self-directed IRAs to ensure you’re in full compliance with IRS rules and regulations.
Curtis Waters
Curtis is a Senior Partner in a real estate investment firm that focuses on property acquisitions, rentals, optimization, and sales. Curtis has a network of financial institutions, hedge funds, wholesalers, and bulk sellers that he uses to acquire properties at superior prices. Curtis is more conservative with investor funds than with his own money.
