When it comes to self-directed investing, the most frequent questions are about what kinds of investments and transactions are acceptable and which are not. Both the Internal Revenue Code and ERISA have sections pertaining to self dealing and “prohibited transactions”. Most prohibited transactions are the result of commerce between your retirement account (the plan) and a “disqualified party. Before we explain prohibited transactions, we should clarify what a “disqualified party” (sometimes referred to as a “party of interest”) is:

In regards to an IRA, a disqualified party is:

• The IRA owner or spouse;
• The IRA owner’s lineal descendants (children and grandchildren) and ascendants (parents and grandparents)—brothers, sisters, nieces nephews, uncles, and aunts are just fine!
• Any entity (corporation, estate, partnership) that has a combined ownership greater than 50% by any of the disqualified personages.
• A 10% owner, officer, director or highly compensated employee of such an entity.
• A fiduciary of the IRA or person providing services to the IRA (custodian or trustee).

The goal or intention of a retirement plan is to benefit the retirement account holder upon retirement and not any time before. Because of this, prohibited transactions are mainly involved in aspects where your plan is benefiting a disqualified party now, rather than later—which often times are designed to avoid paying taxes on realized gains.

Your retirement account cannot, directly or indirectly, sell, exchange, or lease any property to or with you or a disqualified party. Some examples of prohibited transactions included, but are not limited to:

• Using your retirement plan to buy a home for you to live in now.
• Pledging assets of your retirement as collateral for a loan.
• Selling personal investment property to your IRA.
• Buying collectibles such as rugs or gems with retirement funds.
• Loaning money to your child.
• Owning/Purchasing stock in an S Corp
• Paying yourself fees from cash flow (i.e.– rental income) off your plan’s investments.
• Using your Traditional IRA to benefit your ROTH IRA
• The purchase of life insurance.

Do not be discouraged by this as there are many ways in which you can maximize your retirement account’s potential without violating the rules that govern this industry. Working with a Retirement Account Facilitator, such as Guidant, should ensure that you are structured correctly and can ultimately satisfy your long term objectives. It is important that you work with someone who clearly understands the rules and regulations set forth by the IRS and the Department of Labor.