What are Prohibited Transactions?
Prohibited Transactions are commonly referred to as self dealing. An IRA cannot engage in transactions with disqualified persons. The most obvious disqualified persons include, but are not limited to, the account holder, his/her ancestors, and his/her descendants and their spouses. The rules regarding prohibited transactions are quite complicated. You should seek legal advice if you are considering a transaction that could be prohibited.
Prohibited transactions are those transactions that violate the basic intent of the self directed IRA. Your self directed IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. Generally, prohibited transactions involve one of the following: • Doing business with a disqualified person; • Benefiting someone other than the IRA; • Loaning money to a disqualified person; or • Investing in a prohibited investment. Who is a disqualified person? • The self directed IRA holder and his or her spouse; • The self directed IRA holders ancestors, lineal descendants and their spouses; • Investment advisors and managers • Any corporation, partnership, trust or estate in which a disqualified person has a 50% or greater interest, and • Anyone providing services to the self directed IRA such as a trustee or custodian. What are some types and examples of prohibited transactions and/or self-dealing transactions? • Self dealing with a family mem
You cannot invest in Collectibles, S Corporations or Life Insurance Contracts. There are also certain transactions in which you cannot participate when using IRA funds, designated as “prohibited transactions”. Prohibited Transactions are defined in IRC 4975(c)(1) and IRS Publication 590. These transactions were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Sometimes professionals refer to these as self-dealing transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit instead of benefiting the IRA. If you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. There is more detail on prohibited transactions at the end of this article. Selecting and Setting Up a Self-directed IRA Creating a self-directed IRA is easy. In order to own these special assets in a retirement account, you’ll have to find a firm that offers a self-directed IR
Who is disqualified? Section 4975 of the Internal Revenue Code defines prohibited transactions. Generally, they are transactions that directly or indirectly benefit the owner of the IRA or 401(k). The owner of the account is a disqualified person – you. Also included are your spouse, parents, grandparents, children, spouse’s children, any fiduciary of the plan, and any person providing services to the plan. Also disqualified would be any company or entity where you, the plan owner, have more than 50% interest. What is a prohibited transaction? A prohibited transaction is a transaction (sell, exchange, lease, lend, services, asset transfer, use of income) with a disqualified person. Who is not disqualified? Brothers and sisters are ok. Also included are your spouse’s brothers and sisters, you spouse’s parents, your spouse’s grandparents, your stepchildren, your spouse’s stepchildren (except your children!) your aunts, uncles and cousins. Isn’t this fun? One of the best charts I have fou
