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Prohibited Assets and Prohibited Transactions in a Self-Directed IRA

Estimated reading time: 2 minutes, 57 seconds

Wondering what’s allowed to be held in an IRA? It’s actually better to study what cannot be held in an IRA instead of what can be held. The inclusivity of these rules also applies to transactions that may be made in an IRA. There are far fewer transactions you cannot do than those you can.

In this post, we narrow down the few prohibited assets and prohibited transactions when investing with IRA funds.

First, let’s look at the investments considered off-limits by the IRS under 26 U.S. Code § 408 and § 1361:

  • life insurance contracts;prohibited assets and prohibited transactions
  • collectibles like artwork, rugs, antiques, gems, stamps, alcoholic beverages, and most metals or coins (with some exceptions as disclosed in 408[m][3]); and
  • subchapter S corporations.

That’s it! The IRS has never published a list of investments allowed in an IRA. They’ve only outlined the three prohibited assets above.

That’s not to say your custodian will allow certain other assets. It’s up to the custodian to decide what assets can be held on its platform. Unlike Kingdom Trust, not all custodians are well-versed in the custody of assets beyond stocks, bonds and mutual funds.

But what about prohibited transactions? Are they the same as prohibited assets? No, and it’s important not to confuse these two, as they really are quite different.

Prohibited assets are assets in which you cannot invest using IRA funds. Prohibited transactions are transactions prohibited by law between an IRA and a disqualified person. See the difference?

So, now let’s look at the transactions considered off-limits according to 26 U.S. Code § 4975:

  • sale or exchange, or leasing, of any property between a plan (i.e. an IRA) and a disqualified person;
  • lending of money or other extension of credit between a plan and a disqualified person;
  • furnishing of goods, services, or facilities between a plan and a disqualified person;
  • transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
  • act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
  • receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Of course, looking at those six types of transactions above might lead you to ask, “Okay, so who’s a disqualified person?”

Any of the following would be a disqualified person:

  • the IRA owner’s fiduciary;
  • members of the IRA owner’s or certain other disqualified person’s family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant);
  • anyone providing services to the plan;
  • an employer or employee organization whose employees or members, respectively, are covered by the plan;
  • any owner, direct or indirect, of 50 percent or more of those employers or employee organizations;
  • an entity of which 50 percent or more is owned or held, directly or indirectly, by a disqualified person;
  • an officer, director, 10% or more shareholder or highly compensated employee of an employer, employee organization, owner or entity mentioned above; and
  • a 10% or more partner or joint venturer of an employer, employee organization, owner or entity mentioned above.

It’s important to know what you’re not allowed to invest in, who you’re not allowed to invest with and what transactions are prohibited. Making a prohibited transaction could result in taxes, penalties and potentially a total disqualification of the account.

Whatever the rules, ensure the holdings and transactions in your IRA follow them closely. Refer to IRS Publication 590-A and 590-B for more on these topics. It’s recommended you consult your tax professional and investment advisor before making any investment using retirement funds.

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