Common Prohibited Transactions
Engaging in a prohibited transaction can be catastrophic for your self-directed IRA or Solo 401(k) plan.
Reading the IRS rules is important, but may not always be entirely useful. In order to best understand the rules, putting some of the restrictions into practical examples is helpful.
Below is the key language in IRC Section 4798(c)(1), with examples of what might violate these code provisions.
A prohibited transaction occurs when there is any direct or indirect:
Sale or exchange, or leasing, of any property between a plan and a disqualified person
- Your plan may not purchase property you or lineal family currently own or have owned in the past.
- You or a disqualified person may not purchase an asset from the plan.
- Your plan cannot rent a property it owns to a disqualified person or a business owned or controlled by a disqualified person.
- Your plan cannot trade an asset it owns for an asset that you or a disqualified person owns.
- You or a disqualified person may not sell property to an unrelated 3rd party and then have the plan purchase from that 3rd party. This would be an indirect transaction, and that 3rd party would be looked at by the IRS as a “straw man” in the transaction.
Lending of money or other extension of credit between a plan and a disqualified person
- You or a disqualified person may not pledge a personal guarantee on a debt instrument obtained by the plan such as a mortgage, credit card, or commercial trade account.
- Your plan may not loan you or a disqualified party money.
- You or a disqualified party may not loan money to your plan.
- You may not pledge your plan assets as security for any personal debt held by you or a disqualified party.
Furnishing of goods, services, or facilities between a plan and a disqualified person
- You or a disqualified person may not work on a plan owned rental property.
- You or a disqualified person may not use personal belongings to furnish a plan owned rental property.
- You or a disqualified person cannot store personally owned items in a plan held property, such as parking your RV on land owned by your IRA.
- If a licensed realtor, you or a disqualified person should not act as realtor for the purchase and sales transactions of your plan.
- You or a disqualified party should not act as a general contractor in the sense of obtaining permits or utilizing any personal licensing or insurance on behalf of your plan.
Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan
- You or a disqualified person may not use a vacation property owned by your plan, even if fair market rent is paid.
- Cash held by a plan may not be transferred to you or a disqualified person or held in a personal account.
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
- Your plan should not lend money to a plan fiduciary such as a financial advisor or CPA.
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.
- You or a disqualified person may not be paid from the plan.
- You or a disqualified person may not earn a commission associated with a plan transaction.
- Your plan should not invest in a company, if such investment insures you a job, contract, or promotion with that company.
Common Questions Related to Prohibited Transactions
Following are some of the questions we are commonly asked that would, unfortunately, result in a prohibited transaction. The answer to all of the following is NO.
- Can I use my IRA to purchase a home to live in?
- Can I use my IRA to pay off the mortgage on my personal property?
- Can my IRA purchase a property for my use as a 2nd or vacation home?
- Can my IRA purchase a property for my child to live in while they are at college?
- Can I use my IRA to help my child purchase a home?
- Can I act as the realtor for my IRA or 401(k) plan?
- Can I act as a contractor and perform work on my IRA or 401(k) owned property?
- Can my IRA LLC or Solo 401(k) obtain a credit card?
- Can my plan lend money to a business that I own?