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Exotic I.R.A.’s: Leaving Stocks and Bonds BehindIt may be surprising, but it is true: No law dictates that retirement plans be invested in stocks, bonds and mutual funds. In fact, the government allows investors to put the money in their I.R.A.’s and Roth I.R.A.’s into almost anything, be it condominiums or airplanes. A growing number of Americans are doing just that, through so-called self-directed I.R.A.’s that steer clear of mainstream investments.
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When I read the opening paragraph of the NYTimes article, my thoughts immediately jumped to the question: is this a prohibited transaction? That would void the IRA, making it immediately taxable (and subject to penalties if you're under 59.5). "When the I.R.S. spots a violation, it shows little mercy." Not a risk to assume lightly.
A music teacher is running an instrument leasing business (inside the IRA) to his students. That might be considered a prohibited transaction because the teacher (a "disqualified person") appears to be providing a referral service (referring his students) to his IRA's business. I really don't understand the rules well enough to say. A disqualified person, such as the IRA owner, must not furnish goods or services to the IRA.
A key virtue of traditional IRAs (e.g. provided by brokerages) is that they ensure you are not coming close to prohibited transactions. Maybe if you're a Mitt Romney building a $100M IRA a self-directed IRA would make sense, but then you'd also have a slew of lawyers backing you up and watching out for you.
It gets even worse. Do a search on "checkbook control IRA". I'll let the pages you find explain that one.
Here's a page I just dug up explaining prohibited transactions and containing lots of links to very technical writeups of ambiguities in the law, what could go wrong, etc.
https://www.questira.com/ira-prohibited-transactions-every-investor-needs-to-know/
To its credit, this is a page being provided by one of the companies that you can use to set up a self-directed IRA.