Rules of Investing Into Self Directed IRA’s

by Junior Boomer on June 28, 2010

Self Directed IRAs allow the account owner to make all of their own investment decisions. Regulations for self directed IRA’s require that a custodian or qualified trustee holds the IRA assets, keep records pertaining to the IRA transactions, file IRS reports and send statements to the account owner.  With recent declines of the stock market, many investors are considering using self directed IRA’s to invest into alternative type investments.   But many are still confused on the rules and what you’re really allowed to invest into.   Here’s a closer look on the rules of investing into self directed IRA’s.
Self Directed IRA Rules
Creative Commons License photo credit: Leo Reynolds

What Can Be Invested in Self Directed IRA’s?

Most Self Directed IRA custodians allow account holders to invest in all IRS permitted investment types. You can invest in stocks, mutual funds, bonds, real estate, franchises, tax liens, mortgages, private equity, partnerships, and gold, among other options. In fact,t here are only two investments not permissible for Self Directed IRA investments, which include life insurance and collectibles.

Self Directed IRA Contribution Limits

Contribution limits for Self Directed IRAs are set annually. Current limits for 2010 are $5,000 annually or up to $6,000 for individuals who are age 50 or above, according to IRS Publication 590 available on www.irs.gov.

Rules of Self Directed IRA’s

Most rules pertaining to Self Directed IRAs are called “prohibited transactions”. Typically, a prohibited transaction is inappropriate interactions between disqualified parties. As it relates to a Self Directed IRA, a disqualified party is someone who:

  • Is the owner of the IRA
  • Is the spouse of the IRA owner
  • Is the child or descendant or ascendant of the IRA owner
  • Is an entity with combined ownership greater than 50% of a disqualified person(s)
  • Is a highly compensated employee of entity with combined ownership greater than 50% of disqualified person(s)
  • Is a 10% owner, office or director of entity with combined ownership greater than 50% of a disqualified person(s)

Self Directed IRAs are intended for retirement purposes only, and is not supposed to benefit the account owner before retirement. The following types of transactions are prohibited and against the rules of the Self Directed IRA:

  • Buying a home to live in now using money from your Self Directed IRA
  • Using Self Directed IRA as loan collateral
  • Loaning money from a Self Directed IRA to a child
  • Buying your own personal investment property with your Self Directed IRA
  • Paying fees to yourself as administrator or otherwise from cash flow earned through your Self Directed IRAs investments
  • Buying any collectibles or antiques with money from your Self Directed IRA
  • Buying life insurance with your Self Directed IRA

While many of these prohibited transactions may seem to maximize the potential of your Self Directed IRA, there are many opportunities to do so without violating the regulations and rules of Self Directed IRAs.

How to Set up a Self Directed IRA

There are a number of companies who provide custodian service for Self Directed IRAs. Check with your local bank’s first, or research custodial firms. Whoever you choose to be the administrator will handle the books and contributions but do not give investment advice. With Self Directed IRAs, you need to be prepared to research and choose your own investment vehicles – or pay someone you trust to make those decisions for you.

Remember to keep a diversified portfolio of investments so you are not putting all of your retirement savings at risk. The idea of any type of IRA is to save money for your retirement years and taking large risks with a Self Directed IRA could result in lost money during retirement.

Self Directed IRA With Lending Club

One popular option of investing with Self Directed IRA’s is with peer to peer lender Lending Club.   Lending Club allow you to invest into notes of potential borrowers that have yield investors on average of over 9.6%  You can read more about Lending club on my review post or read about how to open a no fee self directed IRA with Lending Club.

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