Understanding Prohibited Transactions
Having a retirement account is essential during these current times hence why it is provided by various financial institutions. A self-directed IRA (individual retirement account) allows you to have different investments for your retirement savings.
To make the most of your self-directed IRA, you must know and understand what these prohibited transactions are. A self-directed IRA allows you to have more investment choices and flexibility than other retirement accounts. Nonetheless, certain transactions are not permitted by the IRA and limit the way you use your investment.
A self-directed IRA custodian will help you be more aware of the rules and regulations and also keep the tax-advantaged status of your account. It is because making any prohibited transaction will cause your account to lose its qualified tax-protected IRA status even if it’s not intended. You must then pay taxes as well as additional charges.
Always note that an IRA retirement plan does not conduct transactions that benefit you, your business, and your beneficiaries. This act is known as self-dealing and is not permitted. It is essential to know these prohibitions to prevent any misunderstanding on your investments.
BTW, if you are interested in topics like this, learn more here.
Common Examples
Here are some examples of prohibitions you might need to know.
- You may not buy or purchase the private equity shares of your own business as well as any of the disqualified person’s.
- While it is still in your retirement account, you may not hold property or real estate that you or a disqualified person lives in or plan to live in any way.
- Loaning money to yourself or another disqualified person from your IRA or any other tax-advantaged retirement account cannot be made.
- Making Stepped Transactions, also known as a series of transactions that avoid or dodge tax laws on purpose or unintentionally, is not allowed. For instance, You cannot lend money from your IRA to your sister, who then lends it to someone then loans it back to you.
Here are some examples of you can’t invest in at Pacific Premier Trust:
- Life Insurances
- Various Collectibles including arts, stamps, antiques, rugs, gems, or anything that is deemed as a collectible by the U.S. Treasury Department.
- Sub-Chapter S Corporation Stock ( For Solo plans, you can invest in S corporations)
- General Partnerships
- Viatical settlements (Selling of life insurance to a third party)
Disqualified Persons
The rule applied to both you and your IRA is the same as the disqualified persons. These consist of your parents, children, grandparents, your grandchildren, along with their spouses and your fiduciary.
So what is a Fiduciary? The IRS defines it as somebody who:
- That Is authorized or responsible to gives investment advice for a fee to your IRA.
- Executes discretionary authority or discretionary control when managing your IRA or utilizes any power or authority when managing or removing its assets.
- Possess discretionary authority or discretionary responsibility in overseeing your IRA.
Below are considered as part of Disqualified persons:
- Parents
- Grandparents
- Spouse
- Children/Adopted children together with their spouses
- Grandchildren along with their spouse
- The trustee of the trust
- Fiduciary (as mentioned above)
- Companies that belong to disqualified parties.
- A person who provides services to the plan. For example, a CPA or an attorney.
Next are those not considered as a disqualified persons:
- Step-parents
- Step-grandparents
- Step-children with the spouses
- Parents of your spouse
- Aunts, uncles, cousins
- Siblings and stepsiblings
Section 4975 (IRS Code)
The purpose of the information given here is for general information only. Pacific Premier Trus does not provide tax advice. Also, the rules can be changed on short notice.
If you are planning to invest in any retirement account, ensure that the best decisions for your situation are made by seeking advice from a tax specialist or go to the official IRS publications which irs.gov, and review it.
Conclusion
Knowing and understanding these prohibited transactions is vital to help you get the most of your self-directed IRA. It helps you be more aware of the rules and regulations that need to be followed; hence it also avoids making any unintentional violations. It also prevents any misinformation and confusion when you begin to invest. Lastly, always make sure to seek advice from a specialist to ensure the choices or judgments are made for the situation.