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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.

The following chart depicts parties related to your IRA and those not related to your IRA. While your IRA can make an allowable investment with a non-related party, it cannot make an IRA investment with a related party. (Note: A related party is not the same as a relative.)

With Whom Can Your IRA Make an Investment?

Related PartiesNon-Related Parties
  • You
  • Your Spouse
  • Your natural parents and/or your adoptive parents
  • Your natural grandparents
  • Your natural children and/or your adopted children
  • The spouses of of your natural children
  • Any fiduciary of your IRA
  • Any people providing services to your IRA
  • Corporation, partnerships, trusts, or estates in which you own, directly or indirectly, at least 50%
  • Your brothers and sisters
  • Your spouse’s brothers and sisters
  • Your spouse’s parents
  • Your spouse’s grandparents
  • Your stepchildren
  • Your spouse’s stepchildren
  • Your grandparent’s spouse, if not your natural grandparent
  • Your aunts, uncles, and cousins
  • Your Ex-Spouse/Life Partner

In addition to understanding the parties with whom your IRA can and cannot make an IRA investment, you must also be aware of some types of prohibited transactions between a related party (disqualified person) and an IRA:

DISCLAIMER: Vantage Self-Directed Retirement Plans does not offer investment, tax, financial, or legal advice nor do we endorse any products, investments, or companies that offer such advice and/or investments. All parties are strongly encouraged to perform their own due diligence and consult with the appropriate professional(s) licensed in that area before entering into any type of investment.