Retire Safe & Tax Free - IRA Prohibited Transactions

man holding tight to his piggy bank representing IRA

What is a prohibited transaction?

A prohibited transaction is an impermissible transaction under the Internal Revenue Code that occurs between an IRA and a disqualified person.

What is the penalty?

If you engage in a prohibited transaction, under IRS rules, your entire IRA will lose its status as an IRA. Your tax-deferred IRA will then be treated as though the assets were distributed to you as of the first day of the year the prohibited transaction occurred. Ordinary income tax will be due on the distributed amount and if you are under age 59 1/2 you will also be subject to a 10% early distribution penalty.

Who are disqualified persons?

IRA owner or beneficiary; IRA owner's spouse; IRA owner's lineal descendants (parents, kids, etc.); spouses of those lineal descendants (daughter/son-in-law); IRA fiduciaries (investment managers/advisors); and any corporation, estate, trust or partnership in which the IRA owner has a 50% or greater interest.

What are some examples of prohibited transactions?

A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person; the sale, exchange or leasing of property; lending money or extending credit; furnishing goods or services; receiving personal benefits or payments; and self-dealing (any act of a fiduciary by which plan income or assets are used for his or her own interest).

Strategy Tip:

If you are unsure whether or not the transaction you wish to participate in with your IRA is prohibited (many self-directed IRA owners face this problem) you may want to consider splitting your IRA prior to the transaction. You will essentially carve out the amount you want to use from your original IRA, creating a separate IRA specifically for the questionable transaction. This way, if it turns out that the transaction you wish to engage in is in fact a prohibited transaction, it will only impact this second IRA and you avoid destroying your entire original IRA.

And, please remember, that what we are here to help you with!

Marc H. Weiss, Archer Weiss Insurance & Financial Services, Inc. Please Call Toll free: 1-800-831-2901 or (818) 610-8560