With all the economic uncertainty going on in today’s world more and more individuals are turning to alternative investments to prepare for their retirement. Working here at Entrust has exposed me to the many different ways in which individuals can alternatively invest their retirement funds through Self-Directed IRAs. One of the main focuses of Entrust is to educate our clients on all of the rules governing alternative investments in their IRA’s. Knowing what the prohibited transactions are for Self Directed IRA’s is crucial knowledge that everyone must know prior to investing any funds.
A self-dealing act is viewed as a prohibited transaction. A self-dealing act is basically any act that could potentially lead to the investor benefiting from his/her IRA prior to distribution. For example, if my IRA were to purchase a home and then I were to live in it or take personal use of that home the IRS would view that as a self-dealing act. I am personally benefiting from my IRA investment by living in it prior to taking the home as a distribution, this is not allowed by the IRS.
The majority of prohibited transactions deal with what the IRS deems as ‘disqualified individuals.’ A disqualified individual is: You (the IRA owner), your children, grandchildren, parents, beneficiaries, your spouse, your spouse’s children, your spouse’s grandchildren, your spouse’s parents, your spouse’s grandparents, any company you control, any fiduciary to your account, and any account in which you are the fiduciary. To use the previous example of investing in a house, none of the above mentioned individuals would be allowed under IRS rules to live in or have any personal use of the home that the IRA owns. If any of the disqualified individuals were to use the home it would be seen as a prohibited transaction and you (the IRA owner) may be subject to various IRS penalties. This IRS rule does not only apply to a home investment but to any Self-Directed IRA investment. Bottom line is the IRS does not allow you (the IRA owner) or any disqualified individuals to benefit from your IRA prior to distribution.
There are various other rules and regulations that should be well known to Self-Directed IRA investors prior to investment. It is extremely important for the investor to know and understand exactly what he/she is getting involved in prior to making any investment decisions. If you have any questions please do not hesitate to contact our Entrust office or go to EntrustFreedom.com.
Daniel Fisher is a Client Services Associate at Entrust Freedom, LLC. Entrust has an arsenal of tax free strategies, feel free to contact Daniel for more information or questions at 239-333-1031 x210 or Daniel@EntrustFreedom.com.