Avoiding Prohibited Transactions in a Self-Directed IRA
A prohibited transaction in an IRA is any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person. It is critical that owners of a self-directed individual retirement account and advisors familiarize themselves with the prohibited transaction rules – particularly when IRA funds can be invested in a variety of assets, including privately offered securities and real estate.
The rules and consequences of an IRA
The Internal Revenue Code of 1986 prohibits IRAs (including self-directed IRAs) from engaging in certain transactions. Generally, these rules are intended to prevent transactions between an IRA and an interested party to the IRA, known as a “disqualified person.” A “disqualified person” includes the IRA owner, a spouse, an IRA beneficiary, family members (such as parents, children, grandchildren and their spouses), an entity that is owned or controlled by any of these individuals, as well as any fiduciary or service provider to the IRA.
Here are the types of prohibited transactions:
- Selling, exchanging or leasing property
- Loaning money or otherwise extending credit
- Furnishing goods, services or facilities
- Transferring IRA income or assets, or using such income or assets by or for the benefit of a disqualified person
- A fiduciary’s dealings with an IRA’s income or assets in such fiduciary’s own interest or for the fiduciary’s account
- A fiduciary’s receipt of any consideration from any party dealing with the IRA in a transaction involving its income or assets
The law exempts some transactions from being prohibited transactions. For example, if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary, this is not considered a prohibited transaction. If you engage in a prohibited transaction, the account stops being an IRA and will be treated as a distribution, incurring taxes and penalties.
How to Avoid Prohibited Transactions
When directing investments in a self directed IRA, you can easily avoid a prohibited transaction by following these ground rules. If you’re not sure, it’s always best to ask your tax or legal professional for guidance.
- Don’t have your IRA transact with yourself personally, your spouse, descendants or ascendants.
- Don’t structure a transaction with your IRA and a third party’s IRA to circumvent an otherwise prohibited transaction.
- Don’t engage in a transaction with an entity that you or the some of your related disqualified persons own a controlling interest (50% or more).
- Don’t personally guarantee a loan that your IRA obtains.
- Don’t make personal use of any asset your IRA owns.
- Don’t provide more than ministerial services (e.g., decision-making) to your IRA or an IRA-owned entity (no “sweat equity”).
- Don’t take any personal compensation for any services provided to your IRA or as a result of a transaction that your IRA participates in.
- Don’t engage in any transaction that results in any personal gain (such as a guarantee of employment) for you or your disqualified persons (other than the benefit that the IRA receives.
- Don’t co-invest personally with your IRA in any asset that you use as loan collateral.
- Don’t take constructive receipt of any income from assets owned by your IRA and do not pay the expenses of assets held by your IRA out of your own pocket.
Now that you know what not to do, you can focus on the tremendous opportunities for creating wealth with a self-directed IRA. You can read more about prohibited transaction and disqualified persons at www.StrataTrust.com or call us at 866-928-9394.
ABOUT STRATA TRUST COMPANY
When alternative IRA custody is this easy, the possibilities are endless.
Founded in 2008, STRATA Trust Company has built a reputation delivering streamlined and straightforward custody. Our service-driven team has helped thousands of investors and investment professionals unlock opportunities in self-directed retirement accounts across a wide range of alternative investments. Formerly known as Self Directed IRA Services, Inc., STRATA has strategically realigned to support a broad range of investment professional partners in growing their IRA asset base – always with an eye on the future.
With offices in Austin and Waco, Texas, STRATA operates as a Texas-chartered trust company with direct oversight by the Texas Department of Banking. Led by a seasoned management team with over 150 years of collective experience, 33,000+ investors empowered and over $1.8 billion in assets under custody, our customers experience a clear difference in our approach to IRA custody.