General Rules – Self-Directed IRA
Are rules meant to be broken? No, certainly not the rules designed for your IRA or any type of retirement account you have. Failure to abide by the rules or comply with the requirements will result to penalties or disqualification which means forfeiture of the intended benefits for your retirement account. You need to have an understanding of the different rules, prohibitions, and exceptions so you can utilize the full capacity of your self-directed IRA. These rules are in place to protect the interest of your IRA. Investment actions should be for the benefit of the IRA.
One general rule is that for every IRA, there must be a designated custodian or trustee. For a self-directed IRA, the custodian generally is just to ensure that records are kept and documents are reported to the government. Another rule is that all income received by IRA investments should stay in the IRA and all expenses incurred, should be paid by the IRA. However, you can make distributions before you reach the age of 59½, but you would be charged the corresponding taxes and an early distribution penalty of 10%.
Prohibited Investments / Assets on Self-Directed IRA
There are limitations to what investments you can make. You cannot invest in life insurance and collectibles such as artwork, rugs, antiques, metals (other than gold, silver and palladium bullion), gems, stamps, coins (except certain U.S.-minted coins), alcoholic beverages, and certain other tangible personal property.
Prohibited transactions on Self-Directed IRA
Your self-directed IRA is intended to benefit you at retirement and not any time before. The
general rule for a prohibited transaction is transactions between the IRA and a disqualified person. The definition of a disqualified party in regards to self-directed IRAs is:
- The IRA owner or the spouse of the owner
- The IRA owner’s lineal descendants and ascendants
- A 10% owner, officer, director or highly compensated employee of such entity
- An entity with combined ownership greater than 50% by a disqualified person(s)
- Anyone providing services to the IRA, such as the trustee or custodian
However, there are certain circumstances wherein the IRA may transact with a disqualified party. For a complete list of prohibited parties and exemptions you may refer to IRS section 4975.
Distributions on Self-Directed IRA
Any distribution before the age of 59½ will be considered an early distribution and will be charged the appropriate taxes and penalties. You are also required to make minimum distributions upon reaching the age of 70½.
These are just a few of the rules you need to know about your self-directed IRA. Compliance with the rules is necessary
to continually enjoy the benefits of your self-directed IRA.