Are you looking for investing in startups? Then, you can utilize your Self-Directed Individual Retirement Account (SDIRA) for the investment.
But, remember that you cannot invest in such alternative assets with a traditional IRA that confines investments to assets, like mutual funds, stocks, and bonds.
Rules to Know
Before setting up your SDIRA, you should make yourself familiar with a set of rules so that you can operate the account smoothly. Read on:
As an SDIRA holder, you should be aware of an important rule–the Prohibited Transactions rule–before making any investment. Adherence to the rule ensures that your SDIRA remains IRS compliant. Failing to abide by the Prohibited Transaction rule can result in steep penalties and
disqualification of the retirement account.
Types of Prohibited Transactions Rule
The Prohibited Transactions rule can be categorized into three: Direct, Self-Dealing, and Conflict-of-Interest.
It involves a transaction by a disqualified person with his/her SDIRA. The meaning will be clear if you look at a typical situation. Suppose an SDIRA account holder uses funds from his account to purchase a stake in a company that his sister owns. It is a transaction between two disqualified persons–the account holder and his sister, a lineal descendant. And the beneficiary is also one of the disqualified persons.
If an SDIRA holder uses his/her income from the account to invest in an asset for personal gains, it will correspond to a Self-Dealing Prohibited Transaction. An example of such a transaction could be an account holder using the funds from his account to invest in a company that he/she controls. The transaction will eventually benefit the account holder. And that is what the IRS prohibits.
If an SDIRA holder transacts funds from his/her account on an entity that has a close connection with him/her, then that transaction falls under the Conflict-of-Interest category. A typical example could be the account holder using the fund of his/her account to loan money to a company in which he/she owns a stake.
Read More: Digital Arp
You should, therefore, avoid making such transactions. You can also obtain a copy of the rules from an IRA custodian. Want to know how to use your SDIRA to invest in startups? Refer to the infographic in this post.