What Are the Restrictions on Using a Self-Directed IRA?
Understanding Prohibited Transactions
Self-directed IRAs offer broad investment freedom—but that freedom comes with critical restrictions to maintain tax-advantaged status. These rules are outlined under IRC Section 4975 and are focused on who your IRA can transact with, not necessarily what it invests in.
The IRS prohibits any direct or indirect transaction between your IRA and a disqualified person. This includes buying, selling, leasing, or lending to/from such individuals.
Who Is a Disqualified Person?
Disqualified persons include:
- You (the IRA owner)
- Your spouse
- Your lineal ancestors and descendants (parents, grandparents, children, grandchildren)
- Spouses of those descendants
- Entities (LLCs, corporations, trusts) where you or disqualified persons have significant ownership (50%+)
Not disqualified: siblings, cousins, aunts/uncles, friends, or unrelated third parties
Common Prohibited Transaction Scenarios
Let’s clarify this with a few examples:
| Scenario | Allowed? | Reason |
| Your IRA buys a property from your father | No | Father is a disqualified person |
| Your IRA loans money to your own business | No | You’re the account owner |
| Your IRA purchases property from your cousin | Yes | Cousin is not disqualified |
| Your IRA invests in an LLC where you’re the manager and owner | No | You’re engaging in self-dealing |
| Your IRA buys a rental property from a third party | Yes | No disqualified parties involved |
Why This Matters
Engaging in a prohibited transaction can lead to the disqualification of the IRA, triggering immediate taxation of the entire account value and potential penalties. That’s why working with a knowledgeable custodian like Directed IRA is critical—we help ensure your investment process stays compliant from the start.
Book a New Account Call with Directed IRA
Our entire Directed IRA team is friendly, knowledgeable, and genuinely excited to help you. Reach out to any of our specialists today and take the first step toward self-directing your IRA or Solo 401(k)!