What Is Not Allowed With A Self-Directed IRA?

Monday, March 4th 2024

Individual Retirement Accounts (IRAs) provide tax-advantaged savings and investing vehicles. One type of IRA known as a self-directed IRA (SDIRA, 1) stands out for its flexibility of investment choices; yet due to IRS regulations on what’s permissible within an SDIRA this post aims to outline both limitations and prohibited transactions that might incur penalties or even disqualify their account from participation altogether.

Prohibited Investments

Let’s first address what kinds of investments are not permitted within an SDIRA account. According to IRS rules, certain classes of assets cannot be held within such an IRA account despite having greater investment options compared with traditional or Roth IRA accounts:

Prohibited Transactions

In addition to investments that are prohibited under IRS guidelines, certain transactions involving an IRA or its assets also fall within its purview as prohibited transactions, known by their IRS equivalent as “prohibited transactions”. Most often these involve “disqualified persons”, including its owner (those related or disqualified by relationship), spouse of owner(s), ancestors of lineal descendants as well as any spouses associated with lineal descendants and any spouses thereof (known collectively as disqualified transactions):

Penalties for Prohibited Transactions

Violating these rules can have serious tax repercussions. Should the IRS determine that an illegal transaction occurred, an entire IRA could be disqualified; its value distributed back to its owner as of the first day of the year in which the prohibited transaction took place; income tax will likely then become payable along with an early distribution penalty if their age falls under 59 1/2.

Participants (usually the IRA owner) in prohibited transactions may incur an excise tax equaling 15% of amount involved for each year (or part year) within the taxable period; should it continue without correction; tax can reach 100% of amount involved.

Correcting Blocked Transactions

If a prohibited transaction has already taken place, corrective steps are available that could help avoid paying 100% excise tax on it. Reversing as much of the transaction as possible and placing your IRA back where it would have been without this event occurring would usually suffice – should such happen, it would be wise to consult a tax professional who specializes in this area first before acting independently.

Securing Your Self-Directed IRA

Self-directed IRA investments can be an efficient and successful means of building retirement wealth; however, you must understand its limitations and restrictions to protect your account effectively. Here are a few steps you can take:


Self-directed IRAs can be used for diversification of retirement funds beyond stocks, bonds and mutual funds; but their increased flexibility is accompanied by greater responsibility since the IRS has strict regulations regarding prohibited transactions and investments which should not be conducted and any infraction could result in serious consequences like taxes due, or even the disqualification of an IRA plan.

As you embark upon the path toward self-directed IRA ownership, remember the keys to successful implementation are understanding the rules, seeking professional advice when in doubt and maintaining transparency and diligent record-keeping practices. By adhering to such protocols, you will maximize the use of your self-directed IRA while remaining compliant with IRS regulations.

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