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RESOURCES

IRS Rules & Regulations

IRA holders can yield considerable tax benefits from their self-directed retirement plans, but they must follow IRS rules and regulations in the process. As long as you and your account remain compliant with the Internal Revenue Code, your self-directed IRA can grow unabated.

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How do you know if you are in compliance?

With the benefits that self-directed IRAs, 401(k)s, and Health Savings Accounts offer, investors must be aware of unique limitations related to these types of accounts, primarily around prohibited transactions. While the IRS does not state what you can do with your IRA funds, they are clear on what you cannot do. Below we provide a brief overview of the rules and relevant definitions found in Internal Revenue Code, Section 4975 that self-directed investors should know.

What is a Disqualified Person or Entity?

A disqualified person or entity is used to describe certain individuals or entities who are not allowed to do business with tax-advantaged plans. This includes the account holder, his or her spouse, any of the account holder’s ascendants (parents, grandparents) and their spouses, or descendants (children, grandchildren) and their spouses. This also includes any business partners or financial advisors of the account holder. While this specific list is not exhaustive, it does provide general principles regarding who can and cannot do business with a self-directed IRA, 401(k), or Health Savings Account. Again, the reasoning for this limitation is these entities would benefit from the account’s funds, bypassing contribution and withdrawal limits, through receipt of economic benefit.

What is a Prohibited Transaction?

The IRS defines prohibited transactions as any sale, exchange, or lease of property or asset between a plan and a disqualified person or entity. Furthermore, any transfer or furnishing of goods or funds between a plan and a disqualified entity (see below) is equally prohibited. The account cannot conduct any business with a disqualified entity to prevent misuse and abuse of tax-advantaged funds.

Who are Non-Disqualified Persons?

The IRS defines prohibited transactions as any sale, exchange, or lease of property or asset between a plan and a disqualified person or entity. Furthermore, any transfer or furnishing of goods or funds between a plan and a disqualified entity (see below) is equally prohibited. The account cannot conduct any business with a disqualified entity to prevent misuse and abuse of tax-advantaged funds.

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