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Yes, they CAN be, (1) if you're staying within what the intended use is (2) you are using an IRA custodian that stays away from the hype and lays out well (and helps you watch, going forward) what can be done without running afounl of the IRA prohibted transactions rules
YOu also have to weigh the pros and cons ... If you're looking at using for reals-estate rentals, for example, you'll be giving up current deductions such as depreciation and rental expenses like upkeep and maintenance ... Also, you'll lose the benefit of the lower capital gains rate (actually there won't be ANY capital gains while inside the IRA... but once you start distributing anything from the IRA during retirement, it's ALL ordinary income
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Direct Prohibited Transaction” generally involves one of the following:
4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified person”
Example 1: Jack sells an interest in a piece of property owned by his IRA to his son.
Example 2: Judy leases real estate owned by her IRA to her father.
Example 3: Brian uses his IRA funds to purchase an LLC interest owned by his son.
4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”
Example 1: Keith lends his wife $10,000 from his IRA.
Example 2: Amy personally guarantees a bank loan to her IRA.
Example 3: Peter uses IRA funds to lend an entity owned and controlled by his mother $60,000.
4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”
Example 1: Eric buys a piece of property with his IRA funds and hires his father to work on the property.
Example 2: Marilyn buys a home with her IRA funds and personally fixes it up.
Example 3: Sara owns an apartment building with her IRA and hires her father to manage the property.
4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA
Example 1: Dan is in a financial jam and takes $12,000 from his IRA to pay his mortgage and credit card bill.
Example 2: Steve uses his IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Steve and transfers those funds back to Steve.
Example 3: Victoria invests her IRA funds in a real estate fund and then receives a salary for managing the fund.
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Self-Dealing Prohibited Transaction” generally involves one of the following:
4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account
Example 1: Jessica who is a real estate agent uses her IRA funds to buy a home and earns a commission from the sale.
Example 2: James wants to buy a piece of property for $110,000 and would like to own the property personally but does not have sufficient funds. As a result, James uses $90,000 from in his IRA and $20,000 personally to make the investment.
Example 3: Dana uses her IRA to funds to invest in a real estate fund managed by her Son. Dana’s son receives a bonus for securing Dana’s investment.
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:
4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA
Example 1: Joe uses his IRA funds to loan money to a company in which he manages and controls but owns a small ownership interest in.
Example 2: Michelle uses her IRA to lend money to a business that she works for in order to secure a promotion.
Example 3: Brandon uses his IRA funds to invest in a hedge fund that he manages and where his management fee is based on the total value of the fund’s assets.
Under Internal Revenue Code Section 4975(d), Congress created certain statutory exemptions from the prohibited transaction rules outlined under Internal Revenue Code Section 4975(c). For these certain transaction, Congress believed there is a legitimate reason to permit them. For these transactions, Congress has issued a blanket statutory exemptions permitting these transactions assuming that certain requirements specified are satisfied. Below is a list of some of the statutory exemptions found in Internal Revenue Code Section 4975(d) that apply to IRAs:
In general, a Self-Directed IRA LLC cannot Invest in life insurance contracts or collectibles defined below:
Because of the shareholder restrictions imposed on “S” Corporations, an IRA cannot own stock in an S Corporation. Note – an IRA can own stock in a “C” Corporation.