IRA Prohibited Transactions

Investment Restrictions – What Your IRA Cannot Invest In

The Internal Revenue Code does not say anywhere what investments are acceptable for an IRA.  The only guidance in the Code is what investments are not acceptable – life insurance contracts and “collectibles”. “Collectibles” are defined as any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, and any other tangible personal property specified by the Secretary.  An exception to these restrictions exists for certain U.S. minted gold, silver and platinum coins, coins issued under the laws of any state, and gold, silver, platinum or palladium bullion. If you direct your IRA to invest in any prohibited collectible, your IRA will be deemed to be distributed to you to the extent of the investment.

Everything else can be purchased in an IRA, provided that the custodian is willing to hold the asset.  According to the Internal Revenue Service, “IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Transaction Restrictions – What Your IRA Cannot Do Legally

Although the Internal Revenue Code lists very few investment restrictions, certain transactions (as opposed to investments) are considered to be prohibited.  If your IRA enters into a prohibited transaction, there are severe consequences (see below), both for you as the IRA owner and for disqualified persons who participate, so it is important to understand what constitutes a prohibited transaction.

The general rule is that a “prohibited transaction” means any direct or indirect

  • Sale or 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, or use by or for the benefit of, a disqualified person of the income or assets of the plan;
  • Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
  • Receipt of any consideration for his 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

Person Restrictions – Who Your IRA Cannot Do Transactions With

pt(Click here for a complete guide to Disqualified People)

Crime and Punishment – What Happens to Your IRA if You Make a Mistake

For the IRA Owner. If the IRA owner enters into a prohibited transaction during the year, the IRA ceases to be an IRA as of the first day of that taxable year.  The value of the entire IRA is treated as a distribution for that year, and if the IRA owner is not yet 59 1/2, there could be premature distribution penalties also.  Since the IRS often does not catch the prohibited transaction for several years, additional penalties can accrue for underreporting income from transactions in years after the prohibited transaction took place.

For Other Disqualified Persons. Initially, an excise tax of 15% of the amount involved for each year (or part of a year) is paid by any disqualified person who participated in the prohibited transaction.  An additional tax equal to 100% of the amount involved is also imposed on a disqualified person who participates in the prohibited transaction if the transaction is not corrected within the taxable period.

Every investor should know about IRA prohibited transactions. Quest IRA provides a series of articles to help you make the right decisions.

  • Entity Investments in Your IRA – Prohibited Transactions and Disqualified Persons

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    This article is part of a series of articles discussing some issues arising when investing your IRA into an entity, such as a limited liability company, corporation, limited partnership, or trust.  Other articles in this series include prohibited transactions and disqualified person, unrelated business income (UBI) and unrelated debt-financed income ...
  • IRA Prohibited Transactions

    I. Investment Restrictions – What Your IRA Cannot Invest In The Internal Revenue Code does not say anywhere what investments are acceptable for an IRA. The only guidance in the Code is what investments are not acceptable – life insurance contracts “Collectibles” are defined as any work of art, ...
  • Self Directed IRA Myths – Groom Law Group

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    A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA. These have been under attack by the IRS. Click the link below to listen to Quest IRA President H. Quincy Long talk about the dangers of Checkbook Control IRA LLCs. Click ...
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    A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA. These have been under attack by the IRS. Click the link below to listen to Quest IRA President H. Quincy Long talk about the dangers of Checkbook Control IRA LLCs Click ...
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