Prohibited Transaction refers to certain types of transactions between the IRA and a disqualified person that are not allowed under the Internal Revenue Code (IRC).
According to IRC Section 4975, disqualified persons generally include the IRA owner, the owner's spouse, ancestors, lineal descendants, and any spouse of a lineal descendant. Other entities such as a corporation, partnership, trust, or estate in which the IRA owner has a 50 percent or greater interest could also be considered disqualified.
Prohibited transactions could involve, for example:
- Sale or exchange, or leasing, of any property between a plan and a disqualified person.
- Lending of money or other extension of credit between a plan and a disqualified person.
- Furnishing of goods, services, or facilities between a plan and a disqualified person.
- Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.
- An act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in his or her own interests or for his or her own account.
If a prohibited transaction occurs, the IRA loses its tax-exempt status and the entire value of the IRA becomes subject to income tax and possible penalties.
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