The prohibited investment restrictions that are applicable to self-directed IRAs (and to all other IRAs, in fact) are sometimes easy to understand and follow. In short, you’re not permitted to borrow money from your self-directed IRA, use your account as security or collateral for taking out a loan, and sell any of your property to the account.
But there are also some provisions that are somewhat less obvious, so there’s more of a potential to inadvertently run afoul of the prohibited investment prohibitions. Here are some tips for avoiding the prohibited investment restrictions applicable to your self-directed IRA.
Know The Restrictions. The first best piece of advice is the simplest – know the restrictions, and know what types of things would constitute a prohibited investment. If you don’t understand what a particular restriction or term means, seek help from someone who can help you. Quest Trust Company has a number of online resources to help you educate yourself so that you’ll be able to spot – and stay away from – any potential transactions that might cause problems for your account.
Plan Ahead. Understand all the implications of a particular investment type before you make it within your self directed IRA. For example, if you choose to invest in a particular piece of real estate which will require an active property manager, make sure to budget for hiring a third party to do so. If you choose to provide the management services yourself, understand that receiving compensation for those management services is a prohibited transaction by your IRA.
Err on the Side of Caution. There’s a difference between any financial risk you take with an investment, and the legal risk inherent in that investment itself. If you don’t fully understand an alternative investment that appears to be permissible within your IRA, don’t invest until you can become completely comfortable with it. You don’t want a tangential aspect of the overall investment structure to invalidate your entire investment by being a prohibited transaction or investment type.
Get a Custodian Who’ll Help You Learn. Unfortunately, we’ve become increasingly accustomed to being left entirely to our own devices when it comes to important financial matters. If you open an IRA with a traditional custodian such as your bank or credit union, you probably won’t have access to very many educational resources. On the other hand, we at Quest Trust Company provide an extensive set of informational materials on our website, and are constantly striving to help you make the best decision for yourself. Since these prohibitions are subject to change over time, like other aspects of the IRA structure, it’s important to stay up to date on the current rules.
Your self-directed IRA can be invaluable to helping you reach your retirement goals. Follow the rules on prohibited transactions and keep your account in good health.