The IRS has set forth certain regulations for self-directed IRAs. You cannot pay yourself or any disqualified person to perform maintenance on properties owned by an IRA and you cannot live overnight in any property purchased with these funds.
Verifying information contained in your account statements, including prices and asset values related to investments like real estate or precious metals is also key.
1. Real estate
Self-directed IRAs give investors the flexibility of building nontraditional asset classes; however, there are certain rules surrounding those assets; for instance, engaging in certain prohibited transactions could cost the IRA its tax-advantaged status and incur penalties.
Examples of prohibited transactions with an IRA account include buying property to rent out to disqualified people, or acquiring it and leasing back for personal use by its owner. It’s also forbidden to pay yourself or anyone disqualified to perform maintenance at properties owned by your IRA account.
Importantly, it’s also crucial to recognize that investments in real estate or other alternative assets must be reported to the IRS. Your self-directed IRA provider (or custodian) should be familiar with these regulations and offer guidance regarding any documents needed for compliance; additionally, they should remind you that you’re ultimately responsible for monitoring investments closely for any prohibited transactions or actions that violate them.
Typically, the IRS prohibits IRA investments in life insurance contracts and collectibles. Otherwise, most assets may be invested in as long as other rules such as not investing in self-dealing entities or dealing with disqualified persons are followed.
With a self-directed IRA, you can take advantage of alternative asset classes such as commercial property and LLC membership interest that aren’t permissible in traditional brokerage firm-held IRAs. These investments provide more investment flexibility and higher potential returns than the typical stock market and mutual fund options.
When investing in non-traditional assets such as gold and Bitcoin, be careful to purchase from reliable dealers who follow all IRS guidelines. Failure to do so could subject you to fines and penalties from the IRS; for example it’s illegal to buy precious metals like gold from sellers who cannot provide proof that their products meet purity standards.
3. Mutual funds
The IRS maintains an exhaustive list of investments which are prohibited transactions and could jeopardize the tax-advantage status of self-directed IRAs, subjecting you to taxes and penalties.
An IRA cannot invest in property owned or rented to disqualified persons, nor pay them for maintenance work on properties owned by an IRA. A self-directed IRA should similarly refrain from paying disqualified people to maintain its owned properties.
Subchapter S corporations impose shareholder restrictions that prevent an IRA from investing in those companies, while life insurance policies and collectibles are also off-limits investments. If you wish to avoid prohibited investments, finding an advisor who not only allows alternative investments but can also vet them and ensure all regulations are followed is essential for making smart choices when investing. There are various providers out there and interview several before making your choice.
4. Other investments
Self-directed IRAs allow investors to invest in various asset classes. Two investments are prohibited due to IRS rules regarding prohibited transactions and disqualified individuals: life insurance and collectibles such as stamps, art or coins.
Alternative assets, such as real estate, tax liens and private equity placements can add substantial diversification to your retirement account. But it’s essential that you understand their rules — such as when and how you purchase and sell them — as well as potential restrictions that might restrict who your IRA works with. It is also crucial that you be aware that custodians don’t vet these investments — you must perform your own due diligence when researching them yourself! You should also be familiar with contribution limits, minimum distribution rules and applicable taxes applicable to different types of IRAs before investing – the IRS also requires an annual fair market value report of your IRA!