Real Estate

Prohibited Self-Directed IRA Transactions

“Generally, a prohibited transaction is any misuse of your traditional IRA or annuity by you, your beneficiary, or any disqualified person.” IRS Publication 590

Well that seems pretty broad and vague, but what can we expect? After all, it is the IRS. They give a definition of a disqualified person that is a bit clearer and more direct:

“Disqualified persons include your trustee and family members (spouse, ancestor, linear descendant, and any spouse of a linear descendant).” IRS Publication 590

Basically, you, your family members, and your trustee are prohibited from “misusing” your IRA funds. That doesn’t seem too sinister, it actually seems quite logical, but unfortunately that’s where the guide ends. They provide some examples of a prohibited transaction, such as borrowing or lending money to your IRA, using it as collateral for a loan, and purchasing property for personal use, but they are all common sense.

There are some general rules of thumb that can be used when investing with a self-directed account.

Avoid doing business with family members, including those who are not expressly disqualified. Just because your self-directed IRA can lend money to your daughter’s fiancĂ© doesn’t mean it should. If you give him some preferential treatment, for example charging less interest, allowing him a different payment schedule, etc., it could still result in a prohibited transaction.

Do not do any work yourself. Every time you perform a service for your IRA, you run the risk of a prohibited transaction. This is not to say that you should not make investment decisions for your assets – for example, if you own a rental property in your IRA, you can make the decision that the carpet needs to be replaced, but you cannot do the job of replacing it. . My favorite analogy is that you can walk behind the gardener and tell him where to push the mower, as long as you are not pushing it yourself.

Never pay or use self-directed IRA funds for personal gain. Basically, you never want the money that is in your IRA to reach your pockets. If they do, you should pay taxes on them (except Roth) and they should be distributions. You cannot cover personal expenses with IRA funds, even if those expenses were incurred in the process of searching for an investment.

Do not do business with companies in which you or your family have a greater interest. You should prevent your IRA from doing business with companies controlled by you or a family member, or companies in which you or your family members have a substantial interest (more than 10%).

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