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Prohibited 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. In addition, it can result in the disqualification of your IRA with possible severe tax consequences. Prohibited Transactions fall into two general categories: Prohibited Investments and Prohibited Transactions.

Note: In this section we will explore what constitutes a prohibited transaction This is a general overview and should not be construed as legal advice. You should seek legal and tax advice before making any investment. Or go to the ultimate authorities on matters concerning IRAs, which are 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

And Certain other Tangible Personal Property Source - IRS Publication 4975

Prohibited Transactions. So what is a prohibited transaction? 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, linear descendant, and any spouse of

linear descendant)."

IRS Publication 590

How can I be a disqualified person? After viewing the list of disqualified persons, a natural question would be "How can I be a disqualified person for my own IRA?" This is where an important distinction must be made; you and your IRA are not one in the same. Although the IRA is established to benefit you and your beneficiaries, it is truly a separate "trust." You (or any other disqualified person) may not personally benefit from your IRA with regards to investments. For a complete list of disqualified persons please see IRC 4975

Self Dealing. Self dealing is described as engaging your IRA in transactions that in some way, benefit disqualified persons. The purpose of the IRA is

to provide for your retirement, it is not intended to benefit you for any disqualified person) presently. As mentioned earlier, disqualified person/s include you and family members of linear descent (i.e., grandmother/daughter, mother/father, son/daughter).

Examples of Prohibited Transaction/Self Dealing:

Self Dealing with Yourself - Having your IRA purchase real estate that you own presently.

Self Dealing with a Family Member of Linear Descent. (Ex: 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 - Paying yourself or a company that you own to do work on a home purchased by your IRA. Receiving Personal Benefits from your IRA - Lending yourself money from 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 where you have knowledge and expertise.

Further Information. IRS Publication 560 - Includes Section on Prohibited Transactions

with Regards to SEP or SIMPLE IRA. IRS Publication 590 - Includes Sections on Prohibited Transactions with Regards to Individual IRAs

IRC Section 4975 - Dealing with Prohibited Transactions

Prohibited Transactions

Transactions Prohibited by the IRS