What is a Prohibited Transaction?

A prohibited transaction is any improper use of your IRA by you, your beneficiary, or a disqualified person. Disqualified persons include your fiduciary and members of your family, including spouse, ancestor, lineal ascendants, and lineal descendants and their spouses.


Who is a Disqualified Person?

Many prohibited transactions stem from the involvement of a disqualified person.  The following people are considered disqualified persons for the purposes of your self-directed IRA:

  • You, the account owner
  • A beneficiary of the IRA
  • Your spouse
  • Your lineal ascendants
  • Your lineal descendants and their spouses
  • Plan service providers and fiduciaries (including advisors, custodians, and administrators)
  • An entity (corporation, estate, partnership, etc.) in which you own at least 50% of the voting stock, directly or indirectly.
  • An officer, director or a 10% or more share holder or partner. 

(See IRS Section 4975 for a complete list of prohibited parties credentials)


What investments are NOT permitted by the IRS?

A self-directed IRA offers a wide range of investment options but the IRS does not allow investments in collectibles such as:

  • Artworks
  • Rugs
  • Antiques
  • Metals (except for gold, silver, palladium, and platinum bullion)
  • Gems
  • Stamps
  • Coins (except for gold and silver coins minted by the US Treasury Department)
  • Alcoholic Beverages

(For more information see IRS Publication 590.)


Types of Prohibited Transactions

  • Sale, exchange or leasing of a property between an IRA and a disqualified person.
  • Extension of credit or cash loan between an IRA and a disqualified person.
  • Furnishing goods, services, or facilities between an IRA and a disqualified person.
  • Transfer of IRA income or assets to, or use by or for the benefit of, a disqualified person. (Example: Renting a property owned by your IRA to your child)

(For more information see IRS Publication 590.)


What are the Potential Consequences?

A Self-Directed IRA allows you more investment options and flexibility than many other retirement accounts but it is of the upmost importance to avoid prohibited transactions in order to adhere to self-directed IRA rules. Failure to comply may lead to costly and serious consequences.

  • If there is a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year.
  • The IRA is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA, the IRA owner will have a taxable gain that is included in his or her income.


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Frequently Asked Questions

What is a self-directed IRA?

A self-directed IRA is an IRA that gives more investment options than a traditional IRA.  Those who open a self-directed IRA have more control and increased diversification of their investments. Some additional investment options that are eligible through a self-directed IRA include: real estate, gold, LLCs, and partnerships.

What are the benefits of a self-directed IRA?

There are many benefits of a self-directed IRA.  Those who open one increase their potential for growth through a more diversified portfolio of assets. This allows the account to be more protected from economic fluctuations when alternative investments in real estate, or precious metals are made.

Which investment options are prohibited by the IRS for self-directed IRAs?

Some investment options that are prohibited include: gems, stamps, antiques, alcoholic beverages, artwork, and metals (except for gold, silver, palladium, and platinum bullion).