February 3, 2023

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Avoiding “Prohibited Transactions” in Your IRA

2 min read

After setting up your Individual Retirement Account (IRA), you will be working to achieve the best possible returns to ensure a comfortable retirement. However, there are limitations on what you can do. Certain transactions are prohibited and you must exercise caution.

Lack of knowledge about these prohibited transactions can lead to serious tax consequences, including penalties and the loss of favorable tax treatment for your IRA. To assist IRA holders, the Internal Revenue Service (IRS) provides a list of prohibited transactions that retirement savers should avoid. Here we review the rules in further detail.

Key Takeaways

  • A prohibited transaction is the improper use of IRA assets by the IRA owner, their beneficiary or “disqualified person” such as a fiduciary.
  • Borrowing from an IRA or pledging IRA assets as loan collateral are both prohibited. 
  • IRAs are restricted from buying life insurance or collectibles.
  • Your IRA trustee or custodian is obligated to make disclosures regarding prohibited transactions.

What Is a Prohibited Transaction?

A prohibited transaction is the improper use of IRA assets by you the IRA owner, your beneficiary or any “disqualified person.” A disqualified person includes:

  • Any family member such as a spouse, ancestor, lineal descendant or their spouse
  • A fiduciary for the IRA
  • Any person who has discretionary authority or control over your IRA assets
  • Any person who provides fee-based investment advice for your IRA
  • Any person who has discretionary authority or responsibility for administering your IRA

Engaging in prohibited IRA transactions can result in penalties, excise taxes, and the loss of IRA status for your assets.

Prohibited Transaction Examples

The following are examples of prohibited IRA transactions:

1. Borrowing Money From Your Plan

Many qualified plans offer loans to participants, but these participants are allowed a certain period within which they must repay the loan with interest. IRAs, on…

2022-06-05 14:37:35

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