<img src="//bat.bing.com/action/0?ti=5104607&amp;Ver=2" height="0" width="0" style="display:none; visibility: hidden;">

Learning Center


Access the largest knowledge base for Self-Directed IRAs. Expand your investor knowledge with articles, whitepapers, practical guides and tons of other educational resources.

About Entrust


For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.

Recent Court Case Underscores the Importance of Not Engaging in Prohibited Transactions

Recent Court Case Underscores the Importance of Not Engaging in Prohibited Transactions

Estimated reading time: 2 minutes

A recent court case ruled that an individual’s IRA was not exempt from creditors despite the individual’s Chapter 7 bankruptcy filing. After the IRA engaged in prohibited transactions and lost its IRA status, the court determined that the IRA was no longer an IRA.  


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made sweeping changes to the handling of retirement plans during individual applications for bankruptcy. IRAs (both Traditional and Roth) have an exemption of $1,000,000 (indexed) from an individual’s bankruptcy estate. 

Employer-sponsored plans such as 401(k) profit sharing plans, Simplified Employee Pension plans (SEP) and Savings Incentive Match Plans (SIMPLE) have unlimited exemption from creditors under a bankruptcy filing because they are employee benefit plans. However, the exemption applies only if the plans maintain their qualified status.

Prohibited Transactions

An IRA that engages in a prohibited transaction ceases to be an IRA as of January 1st of the year in which the transaction occurs. As a result, the IRA loses its tax-deferred status and the benefits that accompany it. According to the IRS, prohibited transactions include transactions considered self-dealing or benefiting the IRA holder or disqualified person while the asset remains in the IRA.

Examples of such transactions include:

  • Borrowing money from the IRA
  • Selling property to the IRA
  • Using the IRA as security for a loan
  • Buying property for personal use (present or future) with IRA funds
  • Using the property while it’s under the retirement plan
  • Performing services for the investment

Examples of disqualified persons:

  • The IRA holder
  • IRA holder’s spouse
  • Family members (i.e., lineal ascendants and descendants)
  • Entities that are owned at least 50% by disqualified persons

In the aforementioned court case, the IRA holder filed for bankruptcy and claimed the federal bankruptcy exemption for their Self-Directed IRA.

Due to several transactions uncovered during the bankruptcy proceedings, which included the account holder borrowing money from the IRA, and check swapping transactions involving the IRA, the court determined that the IRA engaged in prohibited transactions. As a result, the court treated the IRA as it would another any other non-IRA with regard to bankruptcy.     

Because an IRA ceases to be an IRA as of January 1st of the year in which the prohibited transaction occurred, the IRA cannot avail of the $1,000,000 (indexed) federal bankruptcy exemption. 

It’s very important to understand prohibited transactions to avoid losing the tax-deferred status of an IRA. Loss of the IRA’s status results in the loss of additional benefits including sheltering amounts under the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Visit our Learning Center to learn more about prohibited transactions.

cta image

Self-Directed IRAs:
The Basics Guide

Learn about your investment options, Self-Directed IRA rules, and much more!

Like what you read?

Subscribe to our newsletter to get in-depth articles, right in your inbox every month