What are prohibited transactions?
Prohibited transactions are those that occur between your retirement account and a “disqualified” person or entity. Disqualified people include your spouse and other direct family members such as, parents, grandparents, children, grandchildren and their spouses. If a disqualified person has more than a 50 percent ownership in a business or investment opportunity you would like to invest in, it is considered a prohibited transaction. The following are examples of prohibited transactions:
- Lending money or engaging in some other extension of credit between an IRA and a disqualified person. For example, you cannot lend your spouse money from your IRA or personally guarantee a bank loan to your IRA.
- The direct or indirect furnishing of goods, services or facilities between an IRA and a disqualified person. For example, you cannot personally make improvements to a rental property held by your retirement account.
- Using the income or assets of your retirement account to benefit a disqualified person. For example, you may not stay in a vacation property that is owned through your retirement account.
- When a disqualified person who is a fiduciary on the retirement account uses the income or assets of his IRA in his own interest and for his own account. For example, if the owner of the IRA is a real estate agent, she can’t use her IRA funds to buy a house and earn a commission from the sale.
- Receiving any consideration from a disqualified person who is a fiduciary for his account from any party dealing with the IRA in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from the rental property held by your retirement account.
For more information about prohibited transactions, please refer to IRS Publication 590B