Prohibited transactions are dealings your IRA must avoid to comply with IRS regulations that govern retirement plan investments. If you self-direct an IRA, it is your responsibility to understand what these transactions entail and to avoid them at all costs. Failure to do so can dramatically affect the tax-sheltered status of your account.
So, take our advice and don’t mess with the IRS.
Protect yourself and your hard-earned retirement funds by taking the time to learn these rules inside and out. Reading this series of articles on the subject will help.
Our previous blog on the two golden rules of self-directed investing covered the first rule: avoid disqualified persons. These people and entities are restricted by the IRS from doing business with your IRA.
The second golden rule discussed in this blog is to beware of prohibited transactions. But, the two golden rules go hand in hand. Because, dealings with disqualified persons are considered prohibited transactions.
Not only can your account be penalized or taxed, it can even be disqualified over transactions that are forbidden. So, Advanta IRA recommends a few ways you can avoid accidentally making these mistakes.
One way to avoid prohibited transactions is to always consider yourself and your self-directed IRA as separate entities—because you are.
As the plan owner, you have great control in choosing your own investments, but any asset purchased with plan funds is owned by the plan and not by you personally.
Another way is to clearly understand that IRA-owned assets are meant to benefit you when you retire.
Investments cannot benefit you in the here and now—but only at the time you retire and can begin taking distributions. Remembering this fact will lessen issues that could arise should you act otherwise.
Common Prohibited Transactions with Disqualified Persons Include:
- Borrowing money from your IRA; loaning funds to another disqualified person
- Using your IRA as security for loans
- Using your IRA to buy property from yourself or other disqualified persons
- Buying real estate in your IRA for personal use (such as a vacation rental)
- Purchasing property from or selling IRA-owned property to a disqualified person
- Receiving personal income from rental property owned by your IRA
- Renting to or allowing a disqualified person to inhabit property owned by your IRA
The above are just a few examples to give you a feel for what is not allowed in your IRA. For a comprehensive list of the rules and consequences regarding prohibited transactions and disqualified persons, see IRC 4975.
Additionally, we encourage you to seek proper counsel from appropriate tax or legal advisors familiar with rules for IRAs. These professionals can help you avoid dealings that put your IRA in danger of operating outside the boundaries.
How Advanta IRA Can Help:
As one of the leading self-directed retirement plan administrators in the nation, we ensure the administrative details of our clients’ accounts comply with IRS regulations.
Several of our staff come from accounting, legal, and financial backgrounds. Be assured we have the expertise you need to navigate the rules of investing with retirement funds. We don’t sell investments or give investing advice, but we can fully explain disqualified persons and prohibited transactions regarding these accounts.
Not all self-directed retirement plan administrators allow their clients to invest in every alternative asset, but Advanta IRA does.
Our clients receive personal and professional service tailored to their individual needs and goals. This concierge-style relationship we present, along with our complimentary educational events, has helped many of our clients reach their goals in choosing their own assets to build successful financial futures.
If you are considering self-directing an IRA or other retirement plan, schedule your free consultation with Advanta IRA today.
Download our free ebook, Self-Directed IRAs Made Easy. You’ll find it packed with powerful information to help you understand the benefits of self-directed retirement plans.