Self-Directed IRA Rules: Part 2 of 3 Questions To Ask Yourself

September 13, 2017  --  Episode #269

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Self-Directed IRA rules are complex, complicated and intimidating… until they’re not.  In the last action-packed episode of SDI Talk, you learned question #1 to ask yourself which will magically help you to avoid prohibited transactions entirely.  That one was all about the deep legal concept of DOUBLE DIPPING.  Disgusting, right?  Well today, we move on to question #2 which is… well, I’m Bryan Ellis.  I’ll tell you question #2 of 3 simple questions to ask yourself to eliminate prohibited transaction.  This is Episode #269.



Today we jump into question #2 of 3 questions to ask yourself before every self-directed IRA investment, because if you ask yourself these questions honestly, your odds of committing a prohibited transaction drop to nearly 0.

You can reach today’s show page by visiting SelfDirected.org/269, SelfDirected.org/269.

Yesterday was all about double-dipping, the single biggest risk for prohibited transactions.  Hehehehe.  You mean you haven’t heard of the advanced tax concept known as double dipping?  Hehehehe.  If you don’t know what I’m talking about, you really need to visit today’s show page at SelfDirected.org/269 for a link the episode that deals with Double-Dipping.

So, moving right along to question #2 when you’re considering a particular investment for your self-directed IRA is this:

Is my IRA allowed to invest in this type of asset?

Of course, by type of asset, I mean things like real estate, precious metals, cryptocurrencies, mortgage notes, etc.

Those things are called asset classes, and fortunately for you, the answer to whether your IRA is allowed to invest in the type of asset you’re considering is PROBABLY yes.

There are really only two hard-and-fast prohibitions, with a third strong recommendation.

The two absolute prohibitions are life insurance and collectibles.

You know what life insurance is.  That’s pretty unambiguous.

Collectibles, on the other hand… slightly less unambiguous.

I think of collectibles as things that are better located in a museum or gallery rather than in a bank vault.  It includes things like antiques, rugs, stamps, most coins & metals, automobiles, etc.

That sort of stuff is totally off limits to your IRA.

One of the resources on today’s show page at SelfDirected.org/269 is a list that the IRS provides of examples of things that are considered to be collectibles.

So there you have it:  If the asset of choice for your next IRA investment is neither life insurance nor a collectible, then you’re not running the risk of making the potentially horrible error of buying a prohibited asset.

If you choose to have your IRA buy that type of asset anyway, the IRS will treat that transaction as if you took a distribution of the money from your IRA and then purchased the asset.  What does that mean for you?  A heap of taxes, penalties and interest.

Don’t do it.  Just don’t do it.

Now there is a 3rd category of asset that you should avoid, but not because it will result in a forced distribution of money from your IRA, but because it will damage the asset itself.

That asset type is S-Corporations.  We won’t go too deep into the weeds on this one, other than to say that most corporations – including those you buy on the public stock market – are normal corporations, also called “c” corporations.

“S” corporations are exactly the same thing as those, just with a special tax designation.  S-corporations  have some really attractive tax advantages and there are a lot of limitations concerning who can own them.

Unfortunately, IRA’s are not qualified to own s-corporations.  So if your IRA buys one anyway, the IRA won’t be penalized, but the corporation will, because it will likely lose the special “s” designation, along with all of the great tax benefits that go along with that.

So, unless you’ve been specifically advised by an attorney with in-depth understanding of the whole situation, you should practically consider “s” corporations as off-the-table for your IRA.

Other than those things – life insurance, collectibles and s-corporations – you’re in the clear in terms of asset compatibility with your IRA.

See, isn’t it easy to remain compliant with self-directed IRA rules?

Question #1 to ask yourself:  Am I double-dipping?

Question #2 to ask yourself:  Is my IRA allowed to invest in this type of asset?

And now we come to question #3.  This is the one that covers any other details we may have missed.

And that question is… what I’ll share with you in the next episode of this show.

Would you like to listen in to that episode and learn about question #3 right now?

Well, great!  You should do that.  Go over to today’s show page, SelfDirected.org/269, and you can get the link to listen in.

Question #3 is a big one.  Maybe the most important one.  It’s also very easy.

So be sure to listen in to the next episode.

And hey, in the mean time, I have a favor to ask of you.  Would you consider stopping by iTunes or whatever podcast software you use, and give us a really nice rating and review…. Assuming, of course, that you like this show?  That really, really, really helps us to get more exposure and more listeners, and that’s what drives me to continue making these episodes because… believe it or not, these roughly 10-minute episodes require HOURS of work to research, write, edit, upload, publish and share.  So if like this show and if you’d be so kind as to stop by iTunes and give us a 5-star rating and review, I’ll be so grateful to you!

And if you don’t like this show very much?  Well then, let’s just let that be our little secret, ok?  Hehehehehe

My friends, invest wisely today, and live well forever.


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What Do You Think

How Do You Ensure That You Do Not Make Prohibited Investments in your Self-Directed IRA?

  • Roger Magers says:

    I’m thinking about investing [minority investment of 100K ] in a Motel LLC structure with my roll-Over 401K.
    Part of the 30% Shareholder downstoke of 1 million aggreagate, of a 5.7 million build out with majority SBA Loan.
    Interest, PLUS equity return over time. Do I need to be concerned how the Investment is viwed by the IRS?

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    Bryan Ellis

    I am host of Self Directed Investor Talk, which I'm told is America's #1 podcast and for affluent self-directed investors. I'm also something of an expert in self-directed IRA's, solo 401k's and 1031 exchanges. You can find more of my writing in some cool places like TheStreet.com, Entrepreneur.com, ThinkRealty and even Forbes (that was always one of my goals!). I live in metro Atlanta, Georgia with my wife and business partner Carole Ellis(she's a real business partner... not just because she's my wife... I'd want to work with her if I wasn't married to her... and I'd want to marry her, too). I also have 4 children ranging in age from 2 to 20 (yes, you read that correctly). It's my goal to be the name everybody thinks of when they think of Self-Directed IRA's and Solo 401(k)'s.