When it comes to making investments using IRA or other retirement funds, the IRS only provides rules for what you cannot do, it does not disclose the type of investments you are permitted to make. Thus, the Self Directed IRA rules are centered round prohibited type of transactions that are not permitted using IRA or retirement funds. In other words, as long as the investment or transaction does not violate an IRS Self Directed IRA rule.
The Self Directed IRA rules can be found in two places in the Internal revenue Code – sections 408 and 4975.
Pursuant to Internal Revenue Code Section 408(m), an IRA may not invest in life-insurance contracts and certain collectibles, such as: any work of art, any metal or gem, any alcoholic beverage, any rug or antique, any stamp, and most coins. However, the self Directed IRS rules do include an exemption for certain types of precious metals that satisfy the following elements:
- one, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure);
- one ounce silver coins minted by the Treasury Department;
- any coin issued under the laws of any state;
- a platinum coin described in 31 USCS 5112(k) ; and
- gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).
Internal Revenue Code Section 4975 identifies the broader set of Self Directed IRA rules when it comes to using IRA funds to make an investment.
An IRA prohibited transaction is any improper use of IRA funds by you, your beneficiary, or any disqualified person.
Pursuant to Internal Revenue Code Section 4975(c) prohibited transactions include but are not limited to any direct or indirect – a) sale or exchange, or leasing, of any property between a plan and a disqualified person; b) lending of money or other extension of credit between a plan and a disqualified person; c) furnishing of goods, services, or facilities between a plan and a disqualified person; d) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.
Internal revenue Code Section 4975(e)(2) defines a disqualified person as essentially you (IRA holder), fiduciary, any members of your family including spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. Note: siblings, cousins, aunts, uncles and other family members are not considered disqualified persons.
The Self-Directed IRA rules were created to essentially prohibit someone to use their IRA or retirement funds in a way that personally benefits them or any disqualified person. The IRS did not want an IRA holder to benefit it any way from using their IRA or retirement funds without paying tax and penalty, if applicable, on the amount.
Although the Self Directed IRA rules are broad, as long as you don’t use IRA funds to purchase life insurance, collectibles, S Corporation stock, or engage in any transaction with a disqualified person, you will likely not run afoul of any the Self Directed IRA rules