Prohibited Transactions of Self-Directed IRAs

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Self-directed IRAs have reached popularity in recent years, allowing for flexibility and choice of investments. Accountants need to advise their clients on how a misstep of the rules can cause an IRA nightmare. The IRS has strict rules on prohibited transactions (IRC 4795). Keep in mind that IRAs are a completely separate entity, and not following these prohibited transactions rules can result in losing the IRA status.

Prohibited Transactions

  • Sale, exchange or leasing of any property between a plan and a disqualified person
  • Lending of money or other extension of credit between a plan and a disqualified person
  • Furnishing of goods, services or facilities between a plan and a disqualified person
  • Transfer to, use by or for the benefit of a disqualified person of the income or assets of a plan
  • Act by a disqualified person, who is a fiduciary that deals with the income or assets of a plan in his/her own interests, or for his/her own account
  • Receipt of any consideration for his/her own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection, with a transaction involving the income or assets of the plan

Disqualified Persons

A disqualified person is defined as the account holder and spouse, lineal descendants (children, grandchildren, parents, grandparents, etc.), fiduciaries, trustees, investment managers and advisers, as well as any corporate entity in which the account holder has at least a 50 percent ownership.

An example of a prohibited transaction is when the IRA purchases a rental home and your spouse is the real estate agent who receives a commission for the sale. Another example of a prohibited transaction is having your grandson mow the lawn of the rental home for compensation.

Prohibited Investments

The following are investments or assets that the IRA is not allowed to own. For a complete list, see IRS Publication 590.

  • Work of art
  • Stamps
  • Coins (exception U.S. Minted Gold or Silver Eagle)
  • Alcoholic beverages (wine, scotch)
  • Antiques
  • Rugs
  • Insurance contracts
  • S-corporation stock

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