The Internal Revenue Code does 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.
The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975.
If a contributor to an IRA or his or her beneficiary engages in a transaction prohibited by Internal Revenue Code Section 4975 , the account ceases to qualify as of the beginning of the year in which the transaction occurs, and the account balance is deemed distributed at that time. However, the excise taxes normally imposed on prohibited transactions do not apply to an IRA contributor to whom the IRA is deemed distributed under the foregoing rule.