A self-directed IRA can help you reach your long-term retirement goals by permitting you to invest in a wide range of asset classes. But while you’ll be able to invest in things like real estate and gold bullion, there are still limits to what you can hold within your self-directed IRA.
Rest assured that when you maintain your self-directed IRA with Quest Trust Company you’ll be able to invest in anything that’s legally permitted, unlike traditional IRA custodians. Rather, the prohibited investment types are actually specified in the IRS regulations. With that in mind, here are some of the prohibited investment types you need to beware of.
Borrowing Money From Your Self-Directed IRA. It’s true that your self-directed IRA is a “piggy bank” of sorts — at least when it comes to helping you meet your long term retirement goals. But unlike some 401(k) plans that you may have participated in with your employers, you can’t borrow money from your IRA. Borrowing any funds from your IRA will trigger penalties and taxes, even if you quickly pay the money back into your account.
Sell Property to Your Self-Directed IRA. You can buy investment property with your self-directed IRA, but you need to purchase that property from an unrelated third party. If the property you purchase with your IRA is one that you currently own or hold an interest, then the entire transaction may be invalidated.
Use Property Held By Your Self-Directed IRA. By the same token, the property you hold within your self-directed IRA must be kept as an investment asset that you receive no current benefit from or use of. For example, if you hold a vacation property in your account, you may not use that property, even if you pay whatever rental fee you normally charge to third parties.
Use Your Self-Directed IRA as Security for a Loan. If you engage in a significant amount of investment activity outside of your self-directed IRA, there will undoubtedly be situations where you’re asked to pledge a certain amount of your assets as security for a loan you may be seeking. Your self-directed IRA may not be used for this purpose, even if it represents the single most valuable account you hold.
Compensate Yourself for Any Asset Management. Some of the asset types you may invest in with your self-directed IRA can require active management. You can hire an unrelated third party to perform these management services, and compensate that party for doing so. But if you perform these services yourself, you cannot pay yourself any compensation.
Buying Assets From Any Disqualified Person. Not only are you prohibited from buying any assets from yourself with funds from your self-directed IRA, you are also prohibited from doing so from any lineal family member (including your children and grandchildren, your parents and grandparents, and any spouses).
Quest Trust Company can help you educate yourself on always staying clear of any prohibited investments with your self-directed IRA.