How do the prohibited transactions rules apply to IRAs?
A prohibited transaction with respect to an IRA occurs if the owner or beneficiary of the IRA engages in any of the transactions described in Q&A-2. However, in this case, with an individual retirement account, instead of imposing an excise tax on the parties to the transaction, the Code provides that the account is no longer an individual retirement account, and it is treated as if the assets were distributed on the first day of the taxable year in which the prohibited transaction occurred. (Code ยง408(e)(2)) A prohibited transaction can also occur between an IRA and a disqualified person other than the IRA owner or beneficiary, such as a relative of the owner or beneficiary or a fiduciary. If a prohibited transaction with respect to an IRA involves a disqualified person other than the IRA owner or beneficiary, then that other person is subject to the prohibited transactions excise tax. For additional information, see Publication 590, Individual Retirement Arrangements (IRAs).
