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Self-Directed IRA – Rules and Guidelines

IRA Rules

Self-Directed IRAs are generally permitted to engage in most types of investments, however, there are a few Self-Directed IRA rules that IRA holders must be aware of when making investments. If a Self Directed IRA engages in certain types of “prohibited transactions” or invests in life insurance or collectibles you may jeopardize the tax-deferred status of your IRA account. This could lead to the disqualification of the IRA and severe tax consequences. Therefore, it is important that you familiarize yourself with the IRA rules.

Self-Directed IRA Rules

Swanson v. Commissioner

Swanson v. Commissioner, 106 T.C. 76 (1996) is a landmark case confirming the ability of IRAs to create and invest in entities. Mr. Swanson caused his IRAs to form and own two corporations. He was director of each but never owned any stock himself. Mr. Swanson then directed the custodian of the IRA to purchase all the original issue stock of the entity. The Tax Court held that initial formation of the company by the IRA is not a prohibited transaction under Internal Revenue Code Section 4975 because the sale of stock to the IRA was not a sale or exchange of property between a plan (the IRA) and a disqualified person within the meaning of Code Section 4975(c)(1)(A). The Tax Court also held that receipt of dividends by the IRA from the company was not a prohibited transaction because the dividends did not become IRA assets until they were paid. The Tax Court also held that Mr. Swanson’s performance of management functions, as director of the company, was not a prohibited transaction. However, the Tax Court did state that after creation of the entity, the entity became a “disqualified person”.

In FSA 200128011 the IRS affirmed Swanson and stated: *”In light of Swanson, we conclude that a prohibited transaction did not occur under section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs in this case. Similarly, we conclude that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under section 4975(c)(1)(D). We further conclude, considering Swanson, that we should not maintain that the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, constitutes a prohibited transaction under section 4975(c)(1)(E).”*

Get in Touch

To learn more about Self-Directed IRA rules, we encourage you to download our free IRA Financial Self-Directed IRA info kit. It is a great place to start if you are considering the Self-Directed IRA, or have already established the plan and would like to better familiarize yourself with the rules to stay IRS compliant. You can also call IRA Financial directly at 800-472-0646 to speak with a tax and ERISA specialist. We’re happy to assist you.

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