What is Not Allowed With a Self Directed IRA?

Self-directed retirement accounts (SDIRAs) offer an ideal way to diversify your portfolio. However, SDIRAs must comply with specific rules set by the IRS in order to stay compliant.

One key rule involves prohibited transactions. Your IRA cannot engage in dealings with disqualified parties such as you and/or family members that violate these rules; violations could lead to severe consequences and penalties.

Life Insurance

Life insurance may seem like an investment asset, but its use within a self-directed IRA is prohibited because the IRS considers it to be more of a form of coverage rather than investment. Any prohibited transaction could revoke your tax-advantaged status and reduce any tax benefits for which your IRA may otherwise qualify.

To prevent transactions that break these regulations from taking place, it is vital that individuals always remember the prohibited transaction rules. These regulations outline who can invest and engage in certain financial dealings.

Your disqualified parties include your IRA owner, fiduciary and their immediate family (spouse, children, grandchildren, parents or grandparents). Furthermore, an IRA cannot invest with or provide loans to entities owned by disqualified people (which includes highly compensated employees of such an entity), nor extend loans directly or indirectly through investments to any disqualified entity owned 50% or more by such people (which would include highly paid employees/officers of said entity). Any violation will incur an early distribution penalty of 10% of early distribution.


Self-directed IRAs (SDIRAs) allow investors to choose from a much wider variety of investments than traditional broker-managed accounts; however, certain nontraditional investments must still be carefully assessed for compliance with Internal Revenue Service (“IRS”) prohibited transaction rules – these regulations prohibit certain types of investments such as life insurance policies, investments in S corporation stock and collectibles such as baseball cards, antiques or stamps from being included as possible investments.

An SDIRA must not invest in property owned by disqualified people, nor acquire equity in entities in which its owner serves as director, officer, or controls an interest. Violating these rules will result in its losing its tax-advantaged status and incurring a penalty fee.

Therefore, it is prudent to collaborate with a financial advisor familiar with SDIRA regulations in order to perform due diligence and assess risks before investing. They can also help clients avoid engaging in prohibited transactions which might compromise their retirement account’s tax-deferred status.

Real Estate

Self-directed IRA investments prohibit certain activities known as prohibited transactions, which come under Internal Revenue Code Section 4975 and forbid an IRA from engaging in certain types of transactions with “disqualified persons”, typically your immediate relatives, employees who work for your IRA and anyone who holds control over it.

An IRA owner decides to invest their retirement funds in real estate but doesn’t have enough funds. Instead, they obtain a loan issued directly to their IRA from third parties while personally guaranteeing it. This violates prohibited transaction rules because IRA owners receive personal gain from this investment.

Due diligence should always be conducted when considering nontraditional investments to ensure they fit with your situation and avoid any prohibited transactions. Consultations with a financial professional, real estate expert or attorney is important when making these types of decisions to assess risk accordingly.

Private Equity

Many self-directed IRA holders desire to use their retirement assets to invest in startup companies or private equity investments; however, doing so could run them afoul of prohibited transaction rules.

These regulations aim to prevent IRAs from reaping personal benefits through investment activity, with any prohibited transactions leading to tax bills and penalties being levied on them as a result of lost tax-advantage status.

Imagine this: An IRA owner needs capital to purchase rental property but they do not have enough. In order to finance their purchase, they turn to a friend and arrange seller financing – breaking prohibited transaction rules by personally guaranteeing the loan agreement and thus receiving personal benefit as a result of investing.

An IRA owner could have avoided this issue by seeking and securing an exemption from the Department of Labor before engaging in their transaction, however this exemption rarely exists and it is therefore vitally important for IRA holders to understand the potential dangers associated with prohibited transactions and how best to navigate around them.

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