Common Self-Directed IRA Prohibited Transactions

If you are the owner of an IRA account, it is highly likely that you have come across information or discussions relating to prohibited transactions. However, if you have not, there is no cause for concern.

Suppose you have no desire to be caught participating in one, to put it simply.

Keep reading as this information is crucial for individuals who have investments with a Self-Directed IRA.

Direct Prohibited Transactions

There are three categories in which the types of transactions that could be subject to the prohibited transaction rules can be grouped: Direct, Conflict of Interest, and Self-Dealing.

You sell real estate owned by your Self-Directed IRA to your father.
You lease an interest in a piece of property owned by your Self Directed IRA to your son.
You sell real estate you own personally to your Self-Directed IRA.
You transfer property you own personally to your Self-Directed IRA.
You purchase real estate with your IRA funds and lease it to your mother.
You use your Self-Directed IRA funds to purchase an interest in an entity owned by your wife.
You transfer property you own personally that is subject to a mortgage to your Self-Directed IRA.
You use personal funds to pay expenses related to your Self Directed IRA real estate investment.
You use personal funds to pay taxes and expenses related to your Self-Directed IRA real estate investment.

There are various forms in which an IRA and a “disqualified person” can engage in the direct or indirect exchange of goods, services, or facilities. Here are a few additional illustrations.

Paul purchases real estate with his Self-Directed IRA funds and personally makes repairs on the property
Matthew purchases a condo with his Self-Directed IRA funds and paints the walls without receiving a fee
Mike buys a piece of property with his Self-Directed IRA funds and hires his son to work on the property
Anne buys a home with her Self-Directed IRA funds and her son makes repairs for free
Heather owns an office building with her Self-Directed IRA and hires her son to manage the property for a fee
Pete owns an apartment building with her Self-Directed IRA funds and has her father manage the property for free
Bob receives compensation from his Self-Directed IRA for investment advice
Tom acts as the real estate agent for his Self-Directed IRA

The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”.

Gary lends his daughter $4,000 from his IRA
Gary uses the assets of his Self-Directed IRA as security for a loan
Gary and Mrs. Trump personally guarantee a business loan owned by their self-directed IRA
Gary personally guarantees a bank loan to his Self-Directed IRA
Gary uses his personal assets as security for an Self-Directed IRA investment
Gary uses Self-Directed IRA funds to lend an entity owned and controlled by his father $25,000

Engaging in a prohibited transaction refers to the transfer of income or assets from an IRA to a “disqualified person”, whether it is done directly or indirectly. In practical situations, this could be observed through various scenarios such as the following instances:

Steve uses a house owned by his Self-Directed IRA for personal uses
Tim deposits Self-Directed IRA funds in to his personal bank account
Pat is in a financial jam and takes $12,000 from his Self-Directed IRA to pay a personal debt
Mark buys precious metals using his Self-Directed IRA funds and uses them for personal gain
Jack purchases a vacation home with his Self-Directed Self Directed IRA funds and stays in the home on occasion
Amy buys a cottage on the lake using her Self Directed IRA and rents it out to her daughter and son-in-law
Stallone purchases a condo on the beach with her Self Directed IRA funds and lets her son use it for free
Pitt uses his Self-Directed IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Richard and transfers those funds back to Richard
Houston invests her Self-Directed IRA funds in an investment fund and then receives a salary for managing the fund.
Bloomberg uses his Self-Directed IRA funds to purchase real estate and earns a commission as the real estate agent on the sale
Edison uses his Self-Directed IRA funds to lend money to a company he owns and controls
John invests his Self-Directed IRA funds into a business he owns 75% of and manages

7 BENEFITS OF THE SELF-DIRECTED IRA

The self-directed IRA offers the privilege of complete freedom and control in determining one’s investment decisions and choices, a luxury that is not commonly enjoyed by the average investor.

The acronym IRA refers to Individual Retirement Account, which serves as an excellent method to save for one’s retirement. Many individuals mistakenly view an IRA as an investment in itself, when it actually acts as a container for assets such as stocks, bonds, mutual funds, and other investments. A self-directed individual retirement account (SDIRA) is a unique type of IRA specially designed to hold various investment types that are typically not allowed in regular IRAs.

Although there are numerous benefits to this robust investment tool, we have compiled a list of our favorite advantages. In the following section, you will find information on the top seven exclusive and cost-effective benefits offered by the self-directed IRA LLC.

BENEFIT #1: TAX ADVANTAGES

By having a self-directed IRA LLC, you can maintain the tax benefits of traditional IRAs and also enjoy the advantages of tax deferral and tax-free gains. Any income and gains derived from your IRA investment will be returned to your IRA without incurring taxes, thereby allowing for tax-free growth.

Your investments will not be taxed on their returns; instead, tax will only be paid when a distribution is taken at a later date, allowing your investment to grow without any tax burdens.

BENEFIT #2: INVESTMENT & DIVERSIFICATION BENEFITS

What if we consider investing in real estate and private business entities with a self-directed IRA? Similar to before, this can be done without incurring taxes. Furthermore, it allows you to establish a strong investment portfolio that will yield substantial returns during both prosperous and challenging periods.

BENEFIT #3: ACCESS

With a self-directed IRA LLC, you can directly access your IRA funds, enabling quick and efficient investments without the need for approvals or transferring money to an IRA custodian.

BENEFIT #4: SPEED

When using a self-directed IRA LLC, making investments with your IRA funds becomes easy as you only need to write a check or wire the funds directly from your LLC bank account. This eliminates the need for other retirement accounts to consult with their custodian first, which often causes delays.

BENEFIT #5: LOWER FEES

You can potentially save a significant amount of money on custodian fees with a self-directed IRA LLC account. There will be no obligation to pay fees for custodian transactions or account valuations, which can accumulate to thousands of dollars over time.

BENEFIT #6: LIMITED LIABILITY

When utilizing a self-directed IRA LLC, the limited liability protection provided by an LLC will be advantageous for your IRA. The assets held outside the LLC will be safeguarded from any potential harm.

It holds special significance particularly for IRA real estate investments, as numerous state statutes enforce an extended statute of limitation for claims stemming from flaws in the design or construction of real estate improvements.

BENEFIT #7: ASSET & CREDITOR PROTECTION

By utilizing this specific type of retirement account, you will have safeguarding against personal bankruptcy for a sum of $1 million. Additionally, creditors in the majority of states will also be unable to seize funds from a SDIRA.