Last week we discussed a few common mistakes people make with a self-directed IRA, and today we want to expand on that topic with prohibited transactions. Both the Internal Revenue Code and the ERISA have rules about self dealing and prohibited transactions. Most prohibited transactions pertain to a commerce between your account and a "disqualified party" or "party of interest." What constitutes a disqualified party?
- The IRA owner or the spouse of the IRA owner
- The IRA owner's descendants (children and grandchildren) and ascendants (parents and grandparents)
- An entity, such as a corporation, that has a combined ownership greater than 50% by any of the disqualified people
- A fiduciary of the IRA
The goal of a self-directed IRA, or any other retirement plan, is to provide you with money after you retire and not before. Therefore, most prohibited transactions are when the IRA is benefiting a disqualified party now as opposed to after retirement. A few examples include the following:
- Using the money to purchase a home to live in now
- Using funds to buy collectibles
- Loaning money to your children
- Purchasing life insurance
It's easy to make mistakes if you're not well informed. The experts at Broad financial can guide you through this process and ensure that you know how to maintain your retirement plan and use it correctly.