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IRS Rules & Guidelines

irs-logoOperating within the IRS rules is the key to success when investing with a Self Directed IRA or 401(k). And, initial and ongoing expert advisory service is the most important factor you should consider when evaluating plan providers. Safeguard’s expert advisors and tax attorneys make it possible for you to control and manage your own retirement funds with the utmost confidence.

prohibitedA “prohibited transaction” is defined by the IRS code as a transaction that occurs between a retirement plan and a “disqualified person”. This results in the loss of the tax-deferred status or other penalties being assessed against the plan and it’s assets. As an example, the account holder (disqualified) could not buy real estate (improved or unimproved) for personal use.
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disqualifiedAs a Self Directed IRA or 401(k) account holder, you may not personally benefit from the investments made with your retirement plan. You, along with your spouse, children, grandchildren (and their spouses) parents, and grandparents are “disqualified”. Also, certain entities in which you own more than 50% interest… such as corporations, partnerships, and trusts are disqualified.
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anything-exceptIn 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is allowable including real estate, tax liens, notes, precious metals, stock of private companies, etc.
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What is ERISA?

Congress has passed laws, rules and regulations that encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Retirement plans are defined by the IRS tax code and are regulated by the Department of Labor’s ERISA provisions. Safeguard Advisors attorney consultants are specifically trained in ERISA law.


(Source: Wikipedia.com)

The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans.
ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure to them of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts.

ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself. Responsibility for the interpretation and enforcement of ERISA is divided among the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service), and the Pension Benefit Guaranty Corporation.

Prohibited Transactions

Defined in IRC 4975(c)(1) and IRS Publication 590, these rules were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Professionals often refer to these transactions” as “self-dealing” transactions. This section of the code identifies prohibited transactions to include any direct or indirect:

  • Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
  • Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
  • Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
  • Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
  • Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

Disqualified Persons

A disqualified person (IRC 4975(e) (2)) is defined as:

  • The IRA owner
  • The IRA owner’s spouse
  • Ancestors (Mom, Dad, Grandparents)
  • Lineal Descendents (daughters, sons, grandchildren)
  • Spouses of Lineal Descendents (son or daughter-in-law)
  • Investment advisors
  • Fiduciaries – those providing services to the plan
  • Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.

Allowable Investments

Other than collectibles and life insurance contracts, you cannot invest into the stock of an S corporation. Beyond these restrictions, you can invest into a myriad of options according to IRS Code Sec. 401 IRC 408(a) (3):

The list of possibilities is very long. In no particular order, here are a few of the more popular options for Self Directed IRA investing.

  • Real Estate (improved and unimproved)
  • Secured & Unsecured Notes
  • Tax Liens & Deeds
  • Judgments & Structured Settlements
  • Accounts Receivable Factoring
  • Commercial Paper
  • Equipment Leasing
  • Precious Metals
  • Private Company Stock