Prohibited Transactions

there are some limitations

There aren’t many, but there are some transactions that the IRS does not allow within a self-directed retirement account. 

Self-directed IRA accounts allow more control than a typical retirement account; however, the IRS does place limitations on certain investments. 

If, for any reason, a client makes a transaction that is prohibited, the self-directed retirement account will lose its tax-protected IRA status.  This will trigger tax responsibilities on those funds and can even incur some penalties.

A general rule to keep in mind is that your self-directed IRA account funds cannot make a transaction that directly benefits you or any other disqualified individuals. This is known as “self-dealing” and is prohibited.

Transactions to avoid

Prohibited Transactions

  • Real estate or property that you or other disqualified persons live in, plan to live in, or use in any way while that property is held in your retirement account.
  • Private equity shares of your own business (or that of any other disqualified person).
  • Loan money to yourself or other disqualified persons from your tax-advantaged retirement account.
  • “Stepped transactions,” that is, a series of transactions that circumvent tax laws on purpose or accidentally. For example, you can’t loan money from your IRA to your brother (who’s not a disqualified person), who then loans that money to his wife, who then loans it to you.
  • Collectibles, such as art, antiques, stamps, gems, rugs or anything else the U.S. Treasury Department deems to be a collectible life insurance.
  • The stock of a Sub-Chapter S Corporation (Solo 401(k) plans can invest in an S Corporation.)
  • Viatical settlements (sales of life insurance policies to a third party).
  • General Partnerships

Disqualified Parties

The same rules that apply to you and your self-directed retirement account also apply to disqualified persons. These disqualified persons include your parents, grandparents, children, and grandchildren, plus their spouses and your fiduciary.

The IRS defines a fiduciary as anyone who:

  • Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets
  • Provides investment advice to your IRA for a fee or has any authority or responsibility to do so
  • Has any discretionary authority or discretionary responsibility in administering your IRA

 

These individuals are considered disqualified parties:

  • Grandparents
  • Parents
  • Spouse
  • Children/Adopted Children and their Spouses
  • Grandchildren and their Spouses
  • A Fiduciary (see definition above)
  • A person providing services to the plan, such as an CPA or
  • Attorney
  • Companies owned by disqualified parties

 

These individuals are not considered disqualified parties:

  • Step Grandparents
  • Step Parents
  • Spouse’s Parents
  • Aunts, Uncles, & Cousins
  • Siblings/Step Siblings
  • Step Children & their Spouses

IRS rules

The information provided here is for general information purposes only. Sprout does not provide tax advice and IRS rules may change on short notice. When investing through any retirement account, you should consult a tax specialist or review the official IRS publications at www.irs.gov to make sure you are making the best decisions you can for your specific situation based on the most up-to-date information possible.

These IRS documents can help you understand your opportunities and obligations:

IRS Publication 590A
IRS Publication 590B
IRS Bulletin about IRS Code 4975

Questions?

If you are unsure about whether a transaction is prohibited by the IRS and will disqualify your retirement account, please seek guidance from a Registered Investment Advisor, Broker Dealer, CPA, or a qualified Attorney.