A prohibited transaction is a transaction between a retirement plan and a disqualified person. In the event you commit a prohibited transaction, you must pay a tax, and the IRS may also impose a penalty. Both may be substantial! Be careful and understand the do’s and don’ts.
Prohibited transactions are defined by IRC Section 4975 and generally include the following type of dealings:
- A transfer of retirement plan income or assets to, or use of them by or for the benefit of, a disqualified person
- Any act of a fiduciary by which the retirement plan income or assets are used for his or her own interest
- The sale, exchange, or lease of property between a retirement plan and a disqualified person
- Lending money or extending credit between a retirement plan and a disqualified person
- Furnishing goods or services between a retirement plan and a disqualified person
Examples of possible prohibited transactions with an IRA:
- Borrowing money from your IRA
- Selling property to your IRA
- Using your IRA as security for a loan
- Buying property for personal use (present or future) with IRA funds
- Providing “sweat equity” or professional services to improve any investment owned by your IRA (DO NOT work on your IRA owned investment/rental property)
Who is a Disqualified Person?
- The IRA owner and the owner’s spouse
- The IRA owner’s parents, grandparents and great-grandparents (and their spouses)
- The IRA owner’s children, grandchildren and great grandchildren (and their spouses)
- Any Fiduciary of the retirement plan
- Any entity providing services to your retirement account (your CPA, your Attorney, your Financial Advisor)
- Any entity in which the IRA owner personally owns 50% or more
When Using a Checkbook IRA LLC, all the Rules for an IRA Still Apply
Setting up a Checkbook IRA LLC does not exempt you from IRS rules. It is your responsibility to understand what a prohibited transaction is and to know who is considered a disqualified person. We are here to help. Although we cannot and do not offer investment advice, we can answer question about rules and regulations. Call us to learn more.