What are Prohibited Transactions?
Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. 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 or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant). (See IRS Publication 590 at www.irs.gov). Internal Revenue Code Section 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment. In plain English, prohibited transactions are those transactions that violate the basic intent of the IRA. Your IRA must benefit rather than benefi
Prohibited transactions are dealings that can invalidate your IRA. The following explanation is not a complete listing of the rules on prohibited transactions, but is intended to provide some of the basic rules to consider as you move forward with your personal transactions. In general, most people find that once they understand the concept of Prohibited Transactions the rules are “common sense” and generally easy to follow. If you wish to review the complete Internal Revenue Code (IRC) section(s) on this topic, please refer to IRC Section 4975 (c) (1) and 4975 (e) (1).
Prohibited transactions are direct or indirect economic transactions involving plan assets and a “party-in-interest” or “disqualified person”. These “disqualified persons” or “parties in interest” include fiduciaries, sponsoring employers, certain owners of the sponsoring employer, and certain family members of the owners. Prohibited transactions include the sale, exchange, or lease of property, extension of credit, transfer or use of plan assets, and certain investments in employer securities or real estate. Three common examples of prohibited transactions: 1) Allowing the employer to borrow money from the plan, or withdrawing plan assets for use by the sponsor or a trustee. 2) Failure to deposit participant contributions (and loan repayments) in the timeframe specified by the Department of Labor regulations and guidelines. 3) Failure to properly limit the amount of available loans, obtain promissory notes and follow the terms of participant loan agreements. Prohibited transactions ar
IRC ยง 4975(c) (1), identifies prohibited transactions to include any direct or indirect: Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you. Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA. Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property. Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use. Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA. Receiving any consideration fo
Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. 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, IRC 4975 is the section that lays out the rules on prohibited transactions.
