What are “Prohibited Transactions”?

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Self-directed investors should be aware of, and avoid any, Prohibited Transaction between the IRA and a Disqualified Person.

The following is a summary of what is contained in Section 4975 of the Internal Revenue Code that describes Prohibited Transactions, and tax implications, in detail.

PT:  Lending money or engaging in some other extension of credit between an IRA and a Disqualified Person.

Example: You, the IRA account owner, cannot lend money from your IRA to yourself, your spouse or other disqualified person.  

PT:  Furnishing goods, services or facilities, directly or indirectly, between an IRA and a disqualified person.

Example: you cannot personally make an improvement to a rental property held by your IRA.

PT:  Using the income or assets of your retirement account to benefit a disqualified person.

Example: You may not stay in a vacation property that is owned by your IRA.

PT:  When a disqualified person, who is a fiduciary on the retirement account, uses the income or assets of his IRA in his own interest and for his own account.

Example: you cannot pay yourself income from profits generated from the rental property held by your IRA.

PT:  Receiving any consideration by a disqualified person, who is a fiduciary for his account, from any party dealing with the IRA in connection with a transaction involving the income or assets of the plan.

Example:  if the owner of the IRA is a real estate agent, IRA funds can be used to buy real estate however no commission can be paid to the IRA account owner/agent from the sale.