Prohibited Transactions And Asset Types In Self Directed IRAs

Self-Directed Individual Retirement Accounts are one of the most useful financial tools at your disposal. We’re going to discuss prohibited transactions and asset types in Self Directed IRAs.

SDIRAs give you a greater degree of control over the investments you can make through the retirement account and allow you to take the reins of your long-term financial growth. I’ve always suggested that people should run their own SDIRAs rather than letting some dictatorial custodian who keeps them restricted to a “conventional” set of investments. Some investments which you can make through an SDIRA, that you generally can’t make with a conventional IRA, include commodities, cryptocurrency and real estate.

Although you can select from a wider range of investment options with an SDIRA, the IRs still restricts you from making particular investment decisions. If you don’t comply with these regulations, you could face many financial penalties or confiscation of assets. 

Differences Between SDIRAs And Conventional IRAs

There isn’t much of a difference between an SDIRA and conventional IRAs besides the amount of autonomy either allows you over investment decisions. 

All IRAs are managed by a custodian that’s responsible for maintaining the account and the growth of the portfolio. Custodians for conventional IRAs don’t let their clients make any investment decision through it and manage it all on their own. The custodians for a Self-Directed IRA, on the other hand, only act as financial advisors who will make any and all investments for the IRA after consulting with you first. 

It’s this difference between the control exerted by a custodian that also differentiates the investments made through a conventional and a Self-Directed IRA. There’s no legal injunction that stops custodians of conventional IRAs from making the same investments as those commonly made with an SDIRA. The reasons for why portfolios in conventional IRAs differ from SDIRAs usually follow the thought that unconventional investments are much more volatile and unsafe—thus these are not in the IRA holder’s best interests.

I think that there’s no guarantee you’ll have a satisfactory amount of money saved in your IRA, because conventional investments in securities or stocks are equally as volatile. “Safer” investments are also volatile and might not even generate the ROIs you desire. Conventional IRAs and the custodians for these just hold you back financially. If you’re smart enough and play your cards right, it’s very likely that your SDIRA will make you far more money than a conventional IRA. 

What Is A Prohibited IRA Transaction? 

The IRS outlines a set of guidelines which establish the legitimacy of a transaction through SDIRAs. The regulations are as follows: 

  • Disqualified persons may not transfer assets to their own name or use them for their own benefit.
  • A fiduciary can’t use the SDIRA for their own benefits. 
  • A fiduciary may not make any claims on the profits/financial gains generated from the SDIRA.
  • The holder of the IRA or the fiduciary may not engage in the following actions: 
    • Selling, exchanging or leasing property through the SDIRA. 
    • Lending money through the SDIRA.
    • Use the SDIRA to buy goods, services or facilities.

Who Are Disqualified Persons And Fiduciaries?

The IRS also specifies which people are disqualified and cannot tamper or interfere with how the SDIRA is managed. The list of Disqualified people are as follows: 

  • The account holders themselves
  • Linear ascendants and descendants of the account holder like their parents, grandparents, children or grandchildren. 
  • Spouses of any of the people mentioned above

Similarly, the IRS also identifies which entities or people qualify as fiduciaries: 

  • Accountants, financial advisors or attorneys. 
  • The aforementioned people’s accounts that offer tax advantages. 
  • Business or corporate entities owned by the aforementioned people.

Some Examples Of Prohibited Transactions

I realize there’s a lot of grey area in these descriptions and it takes a while before anyone fully understands how these apply. It’s important that you toe the line here because if you violate IRA regulations, even by accident, then the IRS can dissolve the IRA completely. The rule of thumb is that you can’t use the IRA for your personal or your relatives’/fiduciary’s benefit. To help out, I’ll speak of some examples of prohibited transactions.

Using The SDIRA As A Source Of Cash

The US government and the IRS intend the SDIRA as a source of financial stability when you’ve retired. This means that when you aren’t making pay as an employee, the IRA or SDIRA can help support you financially. Following this line of thought, you can’t take any money out of the SDIRA to help fund your business or personal activities.

The money in the SDIRA must remain untouched for as long as you are an employee or a non-retired individual. The minute you take out any money from the profits from the SDIRA, the account will be dissolved. 

Using The IRA As Security

Although an SDIRA is a financial asset with its own monetary value, it must not be used collateral when trying to arrange for a loan. I’ve met a lot of people who think they can offer their IRAs as security for their loans, but this technically falls under the heading of using the SDIRA for personal benefit. The IRS strictly prohibits any action that even slightly threatens that you might lose your retirement funds and using the IRA as security qualifies as such. 

Buying Property For Personal Use

You can invest in property through your SDIRA, but you can’t use live in it or use it for yourself. All the investments in the SDIRA are considered an asset which may only be used to generate profits. You can rent the property out, fix and flip it or use it in any other financially beneficial way, but neither you nor your relatives’ can use it for themselves. 

Investing In Collectibles

Collectibles are items which derive their financial value because of their rarity. This includes artwork, gems, antiques and similar other items. Since these items are perishable and can’t be insured nor are investment instruments, you can’t invest in these either through the IRA. 


While there are moments when I disagree with governments on how they impinge on the individual’s financial liberty, I do believe that an IRA is very important for your financial stability. 

Following the IRS’s regulations on SDIRA transactions helps you maintain your financial worth and assets when you retire, so you can live better even though your income streams dwindle.  

I do hope you enjoyed this article on Prohibited Transactions And Asset Types In Self Directed IRAs. We discussed the differences between SDIRAs and conventional IRAs in detail.  

For more information on SDIRA’s or conventional IRA’s, please reach out to our team at  Georgetown Trust. They are exceptional at their jobs and will be able to guide you through the process, easily and seamlessly.  

To reach our office, please go HERE, we would be happy to point you in the right direction.

About The Author

Mikkel Thorup host of The Expat Money Show

Mikkel Thorup is the host of The Expat Money Show podcast and the author of #1 Best-Selling book Expat Secrets on Amazon. He has spent nearly 20 years in continual travel around the world, visiting more than 100 countries including Colombia, North Korea, Zimbabwe, and Iran.

His goal is to help Expats like you to generate additional streams of income, eliminate your tax bill, and take advantage of offshore structures so you can travel the world freely and never have to worry about money again. For more information on his legal (but creative) tax strategies for Expats watch this free video.

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