What are the Self Directed IRA Rules

Disqualified Persons

SORRY, YOUR IRA is Forfeit!

Did you know that if you use your Self Directed IRA incorrectly that you could face steep penalties up to have your entire IRA become forfeit and causing you to have to pay taxes on all of it?

 

To give you an example . . . I rolled over my 401K when I left my corporate job from Fidelity to Equity Trust Company, then using funds from the IRA I purchased a house through a short sale and leased it back to the former owner.  My IRA collected the rent, my IRA paid for repairs and paid taxes.  My IRA made all the profits.

That same IRA also purchased a few houses that we then resold for a profit, all the profit going back to the IRA.

The next thing you really need to know about a Directed IRA is that it cannot do business with or provide benefit to disqualified persons.  So who are disqualified person would be YOU, your SPOUSE, Your CHILD, Your GRANDCHILD, Your PARENT or GRANDPARENT.  For some reason brother’s and sisters are not disqualified, but they also frown on doing business with people you are closely associated with like employees and best friends because you could be somehow gaining some sort of benefit from the transaction.

So let’s talk examples.

If my IRA was to purchase a house, I could not live in the house because I would be getting personal gain and my Mother could not rent it from me because she is a disqualified person and would be getting personal gain from the transaction in a free house.

If my IRA was to purchase a house and renovate the house and then market it for sale, I could not list it as a Realtor and earn a commission from the sale.  My son could not list either as he would be getting personal gain in the way of commission and he is a prohibited person.