When it comes to understanding the Self Directed IRA rules, one must first understand the intent of the IRS when it first developed the Self Directed IRA prohibited transaction rules. The IRS and the Internal Revenue Code do not describe what a Self Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.
To begin with, with respect to a discussion on the self directed IRA rules, a transaction involving IRA funds IRA transaction should not involve a “disqualified person”. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest. The prohibited transaction rules outlined in Internal Revenue Code Section 4975 are centered around one using IRA funds in a transaction that directly involves or benefits, directly or indirectly a disqualified person. In other words, if the IRA transaction does not involve a disqualified person you will very likely not run afoul to any of the IRA prohibited transaction rules under IRC 4975.
In addition to the prohibited transaction rules under Internal Revenue Code Section 4975, Internal Revenue Code Section 408 outlines a number of transactions that an IRA may not engage in. Firstly, an IRA may not purchase life insurance contracts. Seconds, an IRA may not purchase any collectibles, such as artwork, a metal or gem, baseball cards, stamps, etc. However, the IRS does permit a Self-Directed IRA to own certain gold coins (American Gold Eagle coins or coins 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 of a certain fineness that is in the physical possession of a financial institution.
In addition, as a result of certain restrictive shareholder restrictions imposed on “S” Corporations, an IRA cannot own stock in an S Corporation. Note – an IRA can own stock in a “C” Corporation.