Prohibited IRA Transactions
Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your self directed IRA. A prohibited transaction can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences. Prohibited transactions fall into two general categories: Prohibited Investments and Prohibited Transactions.
Below, we will explore what constitutes Prohibited Investments and Prohibited Transactions. However, this is a general overview and should not be construed as legal advice. We will include links to the ultimate authorities on matters concerning IRAs, including publications and codes released by the Internal Revenue Service.
Prohibited Investments
The Internal Revenue Code does not approve any investment made inside an IRA; rather the code specifically outlines what types of investments are not permissible or prohibited. These Prohibited Investments include:
- Artwork
- Rugs
- Antiques
- Metals
- Gems
- Stamps
- Coins
- Beverages
- Certain other tangible personal property
Prohibited IRA Transactions
The IRS defines a prohibited transaction as follows:
"Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant)."Please refer to IRS Publication 590, which includes sections on prohibited IRA transactions.
Disqualified persons
After viewing the list of disqualified persons, a natural question would be, "How could I possibly be considered a disqualified person for my own IRA?" The answer lies in understanding an important distinction: in the eyes of the IRS, you and your IRA are not one and the same.
Although the IRA is established to benefit you and your beneficiaries, it is truly a separate "trust." That means that you can (and should) self direct your IRA by instructing Equity Trust, the custodian for your IRA, how to handle its investments; but you are not permitted to personally “touch” the money in your IRA account. As well, you (or any other disqualified person) may not personally benefit from the investments in your IRA, beyond the inherent retirement benefits for which the IRA is established and intended.
For a complete list of disqualified persons, please refer to IRC 4975.
Self Dealing
It is considered self dealing if your IRA is engaged in transactions that, in some way, can benefit disqualified persons. The purpose of the IRA is to provide for your retirement; it is not intended to benefit you (or any disqualified person) presently. As mentioned earlier, disqualified person(s) include you and family members of lineal descent (i.e., grandmother/daughter, mother/father, and son/daughter).
Examples of Prohibited Transaction/Self Dealing:
- With yourself - Having your IRA purchase real estate that you own presently.
- With a family member of lineal descent - Having your IRA purchase real estate that is owned by your father.
- Personal use of IRA property - Using real estate purchased through your IRA as an office, personal residence, vacation home, retirement home or office space.
- Receiving personal benefits from your IRA - Lending yourself money from your IRA. Another would be paying yourself, or a company that you own, to do work on a home purchased by your IRA.
Final Analysis
Again, the IRS does not state what investments or transactions you can make in your IRA, rather it states what investments are prohibited and what makes certain transactions prohibited.
As long as you follow Internal Revenue guidelines, you are permitted to self direct your account in areas in which you have knowledge and expertise.
Further Information:
IRS Publication 560 - Includes information on prohibited transactions with regard to SEP or SIMPLE IRAs.
IRS Publication 590 - Includes information on prohibited transactions with regard to Individual IRAs (Traditional and Roth).