A prohibited transaction can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your self-directed IRA and severe tax consequences.
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).”
–Source: IRS Publication 590
IRS Publication 590 indicates that, in addition to prohibited investments, the IRS prohibits certain transactions within IRAs. Prohibited transactions include investments with disqualified individuals (as defined by IRC 4975), “self-dealing”, and receiving indirect benefits.
The IRS does not provide guidance on what is permitted, but dictate only what is NOT permitted. Examples of prohibited IRA investments include collectibles (such as artwork, stamps, rugs, antiques, and gems), certain coins, and life insurance. See IRS Publication 590 for more information about prohibited investments.