A self-directed IRA is also known as a participant-owned IRA, according to IRS terminology. A self-directed IRA allows you to act as your own IRA broker and/or custodian. You make the investment decisions regarding the fund. You can diversify your retirement account money into lucrative areas while building your retirement fund with tax-deferred profits from your investments. You may be able to use your IRA before retirement age without incurring any penalties.
Disqualified Party
One IRS requirement for self-directed IRAs stipulates that the account is not allowed to have any inappropriate interaction between your IRA and a disqualified party. The IRS defines a disqualified party in a variety of ways. It can be the IRA's owner (you), or if you are the owner, it is your spouse. The person can be any relative of the IRA owner, such as a cousin, uncle, children, aunt, parents and/or grandparents. Another example of a disqualified party is any person that is providing services to the IRA (such as a fiduciary).
Account Maintenance
Your self-directed IRA must be maintained by either a qualified trustee or custodian. You direct this outside party how you want the funds to be invested. These individuals (or entities) must hold your IRA assets on your behalf. They are responsible for filing required IRS reports, issuing account statements to you and assist in helping you understand the IRS rules and regulations regarding your self-directed IRA for as long as you have the account says the IRS.
Prohibited Transactions
The IRS states that your self-directed IRA cannot participate in any activity that is classified as a prohibited transaction. These transactions do not specifically benefit your retirement plan. You are not allowed to use your IRA funds to sell, exchange or lease property to yourself or a disqualified party. Some examples of what is considered a prohibited transaction include using your IRA funds to buy yourself a home to live in now, loaning money to any of your children or purchasing any life insurance. You also cannot sell personal investment property to your IRA. You are prohibited from using your self-directed IRA funds to buy collectibles. Collectibles include items such as gems, rugs, artwork, antiques, precious metals, alcoholic beverages, coins and stamps.
One exception to the collectible rule exists according to IRS Publication 590. You are allowed to invest in silver, gold and platinum-minted coins and/or bullion circulated by the Treasury Department. The gold coin investments must be "one, one-half, one-quarter, or one-10th ounce."
Permissible Investments
The IRS states that you are allowed invest your self-directed IRA funds in a variety of ways. You can purchase real estate. This can include buying your retirement home and currently renting it out. When you receive the rental income, the profit can be reinvested in your self-directed IRA. This would provide you with a tax-deferred benefit. You can buy and sell foreign, commercial, residential and domestic properties as investments. You also are allowed to purchase stipulated amounts of silver and gold, mortgages and tax liens according to IRS Publication 590. You can purchase financial products such as stocks and bonds. You can also use your funds to purchase a small franchise or business.
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