A Prohibited Transaction refers to certain types of dealings between the IRA and disqualified persons. The Internal Revenue Service (IRS) has set forth rules to ensure that IRAs are used primarily for retirement purposes and not for immediate tax benefits or for the benefit of certain individuals tied to the IRA.
A “disqualified person” can include the IRA owner, their spouse, lineal descendants, and their spouses, investment advisers, managers, and any entity in which such persons have a 50% or greater interest.
Here are some examples of prohibited transactions:
- Direct or Indirect Sale or Exchange and Leasing of Property: If you, a family member, or another disqualified person sells, exchanges, or leases property to your IRA, it’s considered a prohibited transaction.
- Borrowing or Lending Money: If you, a family member, or another disqualified person lends to or borrows from your IRA, this is prohibited.
- Furnishing Goods, Services, or Facilities: If goods, services, or facilities are furnished between your IRA and a disqualified person, this is a prohibited transaction.
- Transfer of IRA Income or Assets: If income or assets of the IRA benefit you, or another disqualified person, this is prohibited.
- Use of IRA Assets by a Disqualified Person: If a disqualified person uses IRA assets for their own interest, this is also a prohibited transaction.
Engaging in prohibited transactions can have significant consequences. The IRA could lose its tax-advantaged status, resulting in immediate taxation of the entire IRA balance. In addition, penalties might apply.
To avoid prohibited transactions, it’s essential to understand the rules thoroughly and consider consulting with a financial or tax professional who is familiar with IRAs and the specific regulations surrounding them.