Prohibited Transactions & Disqualified Persons
Self-directed IRAs provide a great deal of freedom, flexibility, and choice of alternative investments to help you take control of your retirement funds. They are also governed by a set of IRS rules pertaining to IRA prohibited transactions that you must be aware of and follow to avoid the losing the tax-deferred status of your account.
The IRS outlines and explains these IRA prohibited transactions in Internal Revenue Code (IRC) 4975.
Prohibited Investments in an IRA
- Your IRA cannot invest in life insurance or collectibles like works of art, antiques, coins and stamps.
- These include transactions between your IRA and yourself or other disqualified persons.
- For example, your IRA cannot lend money to a disqualified person or buy an asset from a disqualified person.
- You or any disqualified person receiving a current benefit from the assets in your IRA.
- For example, if your IRA owns rental real estate, you are not permitted to use the property in any manner or allow any disqualified person to use the property.
Disqualified Persons Include
- The IRA holder and his or her spouse
- The IRA holder’s lineal descendants (children, grandchildren, etc.) and their spouses
- The IRA holder’s lineal ascendants (parents, grandparents, etc.)
- Investment advisors, managers, and fiduciaries, or anyone providing services to the IRA
- Any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest
Consequences for Prohibited Transactions
The IRS has severe consequences for the owner of the plan and persons who participate in IRA prohibited transactions. The IRA owner is subject to potential income taxes, a 10 percent early withdrawal penalty, as well as potential fines and penalties for not reporting the distribution. The IRS is permitted to seize the entire value of your IRA to satisfy any taxes and penalties.
To understand how these rules effect your transactions, please consult your tax or financial professional.