Reader Questions on Self-Directed IRA’s

If you're new here, you may want to subscribe to my RSS feed so you don't miss anything or Follow me on Twitter

Only two types of investments are excluded under IRS Codes:

• Life Insurance Contracts
• Collectibles such as works of art, rugs, jewelry, etc.

What are prohibited transactions?

IRC 4975(c) (1), identifies prohibited transactions to include any direct or indirect:

• Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
• Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
• Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
• Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
• Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
• Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

Who are disqualified parties?

A disqualified person (IRC 4975(e) (2)) is defined as:

• The IRA owner
• The IRA owner’s spouse
• Ancestors (Mom, Dad, Grandparents)
• Lineal Descendents (daughters, sons, grandchildren)
• Spouses of Lineal Descendents (son or daughter-in-law)
• Investment advisors
• Fiduciaries - those providing services to the plan
• Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.

Q: Can I invest in art?

A: Nope, art is a “collectible” and thus explicitly excluded as an allowed investment.

Q: Can my IRA purchase a 4% interest in an LLC that my son also owns a 20% ownership in?

A: As long as you or your son are not drawing any salary or other income outside your capital interest you can. Your son is under the 50% ownership threshhold so it is safe, but tread lightly. You don’t want any self-dealing.

Q: I own a rental house. Can I sell the rental house to my IRA?

A: No. This would be considered “self-dealing”

Q: Can my self-directed IRA’s LLC purchase a 50% interest in a joint-company with my wife’s IRA?

A: No. Your wife would fall in the 50% threshhold of a disqualified person. The IRS would disqualify both your IRA’s and you’d suffer major tax penalties. In your described arrangement it would be easy for the both of you to control the company so as to have personal gain.

Q: I own 25% of a company through my IRA. My son recently got hired through his own merits and I just found out he works for my company now. Will this cause problems?

A: Yes. Since you are part owner, it would be easy for the IRS to assume that your relationship to the investment influenced the hiring decision. You should ask your son to change jobs or divest yourself from this company to protect your IRA from becoming disqualified.