With Freedom Comes Responsibility! While self-directed retirement plans allow you investment control of a wide range of assets, there are some transactions and investments to be cautious of. The basic concept of an IRA is that it is a trust intended to benefit you when you retire. When you invest through a self-directed account, your IRA, not you, owns the investment. You own the account. As such, there are some types of self-directed transactions that could disqualify your IRA and subject it to taxation and penalties.
Two key terms you’ll want to remember about a Self-Directed IRA are ‘self-dealing’ and ‘prohibited transaction’. In general terms, self-dealing refers to a transaction that can provide you personally (instead of your IRA) with immediate financial gain while a prohibited transaction is any improper use of your IRA by you or any disqualified person (party related to your IRA). Internal Revenue Code Section 4975 states: An IRA cannot engage in any transaction (direct or indirect) with anybody or anything considered related to the IRA. The tax code allows you to invest your IRA monies in almost anything within limits, with the exception of collectibles and life insurance contracts which are prohibited investments. Internal Revenue Code Section 408 offers more information on prohibited investments. Trying to interpret these areas of the tax code can be complicated. Vantage strongly recommends that you consult with your trusted advisors before entering into any type of investment.