A self-directed IRA provides a great deal of freedom and flexibility to invest in non-traditional assets. However, that freedom is balanced by rules, regulations, and asset restrictions.

To get the most from your self-directed IRA—and avoid account termination—make sure you’re doing things right.

 Here are some rules to follow:

1. Don’t use your IRA for the benefit of a disqualified person(s).

The use of an IRA to purchase an investment, like a house, to be used personally by the IRA owner or another person disqualified to the IRA is prohibited. Disqualified persons may include immediate family members, employers, certain partners, and fiduciaries.

2. Don’t lend assets to disqualified parties.

The IRA owner cannot borrow retirement funds from their own IRA. However, as long as they are not a disqualified party, you may lend assets to a corporation or person through most classes of loans, secured and unsecured, including traditional extensions of credit, seller financing arrangements, and more.

3. Know which transactions are prohibited.

An IRA owner may not use an IRA and its assets as collateral to personally guarantee any debt of the IRA, nor can you invest in any other prohibited assets. Learn more about prohibited transactions and disqualified persons in this helpful resource from the IRS: Retirement Plan Investments FAQs.

4. Make contributions through your IRA custodian.

Depositing funds directly into your IRA can potentially result in IRS penalties. Make sure to be mindful of annual contribution limits.

5. Consider the impact of Unrelated Business Taxable Income (UBTI).

Income from a trade or business, regularly carried on, that is not substantially related to the IRA is considered UBTI. Oftentimes an IRA owner wishes to passively invest in a business entity, but the business activity itself is not passive. Should that investment be made in a pass-through entity, such as an LLC, the IRA could generate UBTI on any profit derived by the business’ activity.

6. Always act in the exclusive benefit of your IRA.

You, as the IRA holder, have a fiduciary responsibility to act in the best interest of the account. For example, an IRA holder can purchase rental real estate and allow someone they know (that is not a disqualified person) to occupy the property. Although it is not necessarily a prohibited transaction, it can potentially violate the exclusive benefit rule if the rent was not set at fair market value and the terms of the property agreement were not enforced. If the IRA owner has a tenant who is not paying rent, the IRA owner has a fiduciary responsibility to act as a prudent investor would and begin the eviction process. This could be a problem if you have family occupying the property – it creates a conflict of interest for an IRA owner. Not acting in the best interest of the plan could result in a prohibited transaction.

Important considerations for IRA owners

The IRA owner is ultimately responsible for directing the account. It is for this reason that we recommend you consult a qualified legal professional or tax advisor on all transactions. You should also closely monitor transactions and stay informed by referring to as many educational resources as possible.

At Provident Trust Group we want to provide you with the most up-to-date information regarding tax, legislative, and regulatory news. Make sure you don’t miss anything by subscribing to our newsletter. You can also visit the Education Center on our website to browse topics at any time.

Freedom is self-directing your retirement. We’re here to help.

Talk to your third-party representative or call us today to learn more.

This material is provided for general educational and informational purposes only and should not be considered to be legal, tax or investment advice. Provident Trust Group, LLC is a non-discretionary, passive, directed custodian that does not sell or solicit investments and does not provide investment advice or recommendations. Provident Trust Group, LLC is not obligated to review and does not endorse any investment or investment advisor, and individuals are responsible for the investments in their accounts. Consult with a tax and/or financial advisor to determine what may be best for your individual needs.