The Most Common Self-Dealing “Gotchas” for Self-Directed IRAs

Along with the greater flexibility and freedom that you’ll have with a self-directed IRA, you’ll have to make sure you don’t inadvertently violate any of the rules that prohibit any “self-dealing” within your account. Broadly defined, “self-dealing” means using the account funds for your benefit, or the benefit of any “disqualified person” – which includes certain members of your family

Traditional IRA custodians will generally only permit you to buy and sell publically traded stocks and securities on the big exchanges, as well as some bonds and other types of debt instruments. In these types of accounts, it would be difficult to violate any of the rules on prohibited transactions or self dealing.

Here are some of the most common self-dealing “gotchas” that you need to be on guard against when you open a self-directed IRA.

Purchasing Real Estate. If you want to use your self-directed IRA to purchase real estate, you can’t direct you account to buy real estate that you currently own or have an interest in. Furthermore, your self-directed IRA may not permissibly purchase real estate that’s owned by any of your children, grandchildren or great grandchildren, or by your parents or grandparents.

Paying Real Estate Taxes or Management Fees. When you hold real estate in your self-directed IRA, you’ll need to have enough resources within your account to pay your taxes. These funds can come from annual contributions to your account (if you are eligible to make contributions in that tax year, depending on whether you’ve set up your self-directed IRA to be a traditional IRA or a Roth IRA), from an eligible rollover, or be income generated from within your account.

Note that if you don’t have sufficient funds within your account, you are not permitted to pay your taxes, management fees or other carrying costs of the property with money from elsewhere. Paying any of these fees or expenses with funds from outside the account (such as writing a personal check to pay the necessary expenses) can put the tax-advantaged status of your entire account at risk.

Prohibited Stock Transactions. While your self-directed IRA can purchase and hold stock, you cannot purchase that stock from yourself or any other disqualified person. This is true even if you seek to sell the stock at its current market price. This is also true for stock or other ownership interests in corporations, partnerships, limited liability companies or other entities in which you hold a controlling interest. Furthermore, you cannot use your self-directed IRA to purchase any restricted securities from any family member or other disqualified persons.

Prohibited Transaction Types. Finally, even though your self-directed IRA has great investment flexibility, there are still some types of transactions that are prohibited (such as buying life insurance policies or collectibles with your account assets). Make sure you know these prohibitions and follow them.