Everyone needs to invest in a retirement savings plan. Social security just will not provide enough money to meet your needs during retirement years. With fewer and fewer employers contributing to company funded pension plans, individuals need to establish their own retirement plans.

Most Americans have a general knowledge of the Traditional and Roth Individual Retirement Accounts (IRAs), but the lesser known Self directed IRA is a viable option for many participants. This type of retirement plan allows the participant to make investments on behalf of the plan. Since this IRA affords many tax advantages, the Internal Revenue Service requires that the assets be held by a custodian or trustee. This person assumes numerous duties. Among the duties assigned are:

  • This person is charged with maintaining the assets and the associated records.
  • The custodian or trustee must file the required IRS reports.
  • Client statements are issued by the custodian.
  • The custodian is the individual who advises clients on matters regarding rules and regulations relating to prohibited transactions.
  • He or she performs varied other administrative duties on behalf of the Self directed IRA owner.

A trustee or custodian offers investment options to account holders. These options often include stocks, bonds, and mutual funds. Other types of investments may be made and the custodian advises the account owner on the IRS regulations regarding these transactions. Some of the more commonly permitted transactions include:

  • Stocks
  • Mortgages
  • Real estate (both residential and commercial)
  • Franchises
  • Partnerships
  • Private equity
  • Tax liens
  • Farmland
  • New construction
  • Property renovation and development

Additionally, a Self directed IRA can be invested in business that is owned by someone other than the account owner. These investments may include private stock, partnerships, and joint ventures. Other alternative investment opportunities are available. They may consist of:

  • Commercial paper
  • Royalty rights
  • Foreign stock
  • Hedge funds
  • Equipment
  • Leases
  • U.S. Treasury bills
  • American depository receipts

Just as important is the list of transactions that are not permitted in a Self directed IRA. The following transactions are not permitted for funds held in a Self directed IRA.

  • Borrowing money from the fund
  • Selling property to the fund
  • Receiving unreasonable compensation for managing the fund
  • Using the fund as security or collateral for a loan
  • Using fund money to buy personal property

There are substantial penalties for completing prohibited transactions. In most cases, the transaction would be considered as distribution and subject to a 10% early withdrawal penalty. The income is treated as ordinary income. These rules are in place to prevent self-dealing.

While there are many avenues open for investment with a Self directed IRA, a number of transactions are prohibited. A few of these prohibitions include:

  • Investments in life insurance
  • Investment in collectables including:
  1. Antiques
  2. Rugs
  3. Gems
  4. Stamps
  5. Most coins
  6. Tangible personal property
  7. Alcoholic beverages

While this investment option gives the account holder some freedom in selecting his or her own investment opportunities, there are numerous regulations in place regarding the Self directed IRA. It is best to gather sound legal and financial advice before investing in one of these retirement plans.