Investing Within Bounds

Self-directed IRA accounts allow more control than a typical retirement account; however, the IRS does place limitations on certain investments and the way the money is transacted. Sprout takes pride in its awareness and care for these regulations to protect its clients.

If, for any reason, a client makes a transaction that is prohibited, the self-directed IRA account will lose its tax-protected IRA status.  This will trigger tax responsibilities on that money and potentially required penalties.

A general rule to keep in mind is that your self-directed IRA account funds cannot make a transaction that directly benefits you or any other disqualified individuals. This is known as “self-dealing” and is prohibited.

Here are some common transactions that are prohibited in a self-directed IRA:

  • You can’t hold real estate or property that you or other disqualified persons live in, plan to live in or use in any way while that property is held in your retirement account.
  • You can’t purchase private equity shares of your own business (or that of any other disqualified person).
  • You can’t loan money to yourself or other disqualified persons from your IRA or other tax-advantaged retirement account.
  • You can’t make “stepped transactions,” that is, a series of transactions that circumvent tax laws on purpose or accidentally. For example, you can’t loan money from your IRA to your brother (who’s not a disqualified person), who then loans that money to his wife, who then loans it to you.

At Sprout you cannot invest in:

  • Collectibles, such as art, antiques, stamps, gems, rugs or anything else the U.S. Treasury Department deems to be a collectible
    Life insurance
  • The stock of a Sub-Chapter S Corporation (Solo(k) plans can invest in an S Corporation.)
  • Viatical settlements (sales of life insurance policies to a third party)
  • General partnerships

The same rules that apply to you and your IRA also apply to “disqualified persons.” These include your parents, grandparents, children and grandchildren, plus their spouses and your fiduciary.

The IRS defines a fiduciary as anyone who:

  • Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets
  • Provides investment advice to your IRA for a fee or has any authority or responsibility to do so
  • Has any discretionary authority or discretionary responsibility in administering your IRA

These individuals are considered disqualified parties:

  • Grandparents
  • Parents
  • Spouse
  • Children/Adopted Children and their Spouses
  • Grandchildren and their Spouses
  • A Fiduciary (see definition above)
  • A person providing services to the plan, such as an CPA or Attorney
  • Companies owned by disqualified parties

These individuals are not considered disqualified parties:

  • Step Grandparents
  • Step Parents
  • Spouses’s Parents
  • Aunts, Uncles, & Cousins
  • Siblings/Step Siblings
  • Step Children & their Spouses

The information provided here is for general information purposes only. Sprout does not provide tax advice and IRS rules may change on short notice. When investing through any retirement account, you should consult a tax specialist or review the official IRS publications at www.irs.gov to make sure you are making the best decisions you can for your specific situation based on the most up-to-date information possible.

These IRS documents can help you understand your opportunities and obligations:

Verify that you’re investing within bounds. Every Time.