PROHIBITED
TRANSACTIONS
Understanding
what constitutes a prohibited transaction is very important when
it comes to making investments within your self-directed IRA.
A prohibited transaction can bring into question the tax deferred
status of your account. In addition, it can result in the disqualification
of your IRA with possible severe tax consequences. Prohibited
Transactions fall into two general categories: Prohibited Investments
and Prohibited Transactions.
Note:
In this section we will explore what constitutes a Prohibited
Transaction. This is a general overview and should not (underline
not) be construed as legal advice. We will include links to the
ultimate authorities on matters concerning IRA’s which are
publications and codes released by the IRS.
PROHIBITED
INVESTMENTS
The IRS
code does not approve any investments made inside an IRA; rather
the code specifically outlines what type investments are not (underline
not) permissible or prohibited. These Prohibited Investments include:
Artwork
Rugs
Antiques
Metals
Gems
Stamps
Coins
Beverages
And certain
other tangible personal property
PROHIBITED
TRANSACTIONS
So what
is a Prohibited Transaction? 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 a disqualified
person. Disqualified persons include your fiduciary and members
of your family (spouse, ancestor, linear descendant, and any spouse
of linear
descendants).”
IRS Publication 590
HOW
CAN I BE A DISQUALIFIED PERSON?
After
viewing the list of disqualified persons, a natural question would
be, “How can I be a disqualified person for my own IRA?”
This is where an important distinction must be made; you and your
IRA are not (underline not) one in the same. Although the IRA
is established to
benefit you and your beneficiaries, it is truly a separate “trust”.
You (or any disqualified persons) may not personally.
BENEFIT
FROM YOUR IRA WITH REGARDS TO INVESTMENTS.
For a
complete list of disqualified persons, see Internal Revenue Code
4975.
SELF
DEALING
Self dealing
is described as engaging your IRA transactions that in some way,
benefit disqualified persons. The purpose of the IRA is to provide
for your retirement, it is not intended to benefit you (or any
disqualified person) presently. As mentioned earlier, disqualified
person/s include you and family members of linear descent (IE:
Grandmother/Daughter, Mother/Father, Son/Daughter).
EXAMPLES
OF PROHIBITED TRANSACTION/SELF DEALING:
Self Dealing
with yourself – Having your IRA purchase Real Estate you
presently own.
Self Dealing
with a family member of linear descent. (Ex: Having your IRA purchase
Real Estate that is owned by your Father.)
Personal
use of IRA property – Using Real Estate purchased through
your IRA as an office, personal residence, vacation home, etc.
Personal
Benefits from your IRA – Lending yourself money from your
IRA.
Receiving
Personal Benefits from your IRA – Paying yourself or a company
you own to do work on a home purchased by your IRA.
As long
as you follow Internal Revenue Guidelines, you are permitted to
Self Direct your account in areas in which you have knowledge
and expertise.
Further
Information
IRS Publication
560 – Includes section on Prohibited Transactions
IRS Publication
590 – Includes section on Prohibited Transactions
IRC Section
4975 – Deal with Prohibited Transactions
