A prohibited transaction can result in audits, penalties, fines, or worst case, your IRA being distributed.
Doing business with disqualified persons
This includes people such as...
- Your immediate family (spouse, children)
- Parents and grandparents
- Blood-related or officially adopted children
- Spouses of children
- Companies where you own over 50%
- Key highly compensated employees, officers, directors
Self-dealing is working with your own businesses, investments, or conflicts of interest to benefit yourself as well as your IRA retirement. Your IRA should benefit your IRA retirement, and your own interests should not be in conflict with your IRA. Some examples of self-prohibited transactions include...
- Buying a property you already own yourself and putting it inside your IRA.
- Living in the property that is in your IRA.
- Paying yourself a salary to manage your own rental property.
- Remodeling the bathroom of your self-directed investment property as a DIY project.
- Buying land in your IRA, and then building a hunting campsite or lake house cabin you frequent with your friends and family on a small portion of it.
- Creating a significant benefit for a disqualified person, or unwritten quid pro quo in return for you making an investment with your IRA.
- Investing into a racehorse, showdog, or prized livestock animal, and then sending it to your own competitions to compete for prizes and benefits.
Extension of credit
An extension of credit is getting a loan or margin inside your IRA. Any loans inside an IRA must be non-recourse. Non-recourse means that the loaning party can only go after the asset the loan was made for, such as the house or investment inside your IRA, and can't go after your personal assets like your car, personal home, and finances. This might change the terms from what you are used to at current market rates. An example of an extension of credit is...
- Getting a traditional mortgage in you IRA
- Using your personal credit or collateral outside your IRA to secure a loan inside your IRA
- Using your Self-Directed IRA to secure a loan for yourself
- Getting margin in your trading account. Margin loaning typically uses your outside income and assets to secure and confidently lend you the loan.
IRS publication 590A and IRC 4975 discuss prohibited transactions at length.