Use Self-Directed IRA’s with Caution

The penalties for self-dealing or executing a prohibited transaction can be quite severe, including disqualification of the IRA status, early distribution penalties and punitive damages up to 100% taxation. Ouch! If you don’t know what the rules are concerning “self-dealing”, what a “prohibited transaction” is, or who is a “disqualified person”, you need to educate yourself. A great place to start understanding prohibited transactions is IRS publication 590. Here is an example.

The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and sell in cabo members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant).”–Source IRS Publication 590.

Another great place to start learning about what is legal and what is not, is reading in the education sections of some of the major custodians for self-directed IRAs. Here is a short list of some of the major names that come to mind: