Prohibited Self-Directed IRA Transactions
“In general, a prohibited transaction is any misuse of your traditional IRA or annuity by you, your beneficiary, or any disqualified person.” IRS Publication 590
Well, that seems pretty broad and vague, but what can we expect, it’s the IRS after all. They do give a definition of a disqualified person that is a bit clearer and more direct:
“Disqualified persons include your fiduciary and members of your family (spouse, ancestor, direct descendant, and any spouse of a direct descendant).” IRS Publication 590
Basically, you, your family members, and your trustee are prohibited from “misusing” the funds in your IRA. That doesn’t seem too sinister, it actually seems quite logical, but unfortunately that’s where the guide ends. They provide a few examples of a prohibited transaction, including borrowing or lending money to your IRA, using it as collateral for a loan, and buying property for personal use, but they are all common sense.
There are some general rules to use when investing with a self-directed account.
Avoid doing business with any family member, including those who are not expressly disqualified persons. Just because your self-directed IRA can lend money to your daughter’s fiancé doesn’t mean you should. If it gives you any preferential treatment, for example, charging less interest, allowing you a different payment schedule, etc., it could still result in a prohibited transaction.
Do not do any work yourself. Every time you service your IRA, you risk a prohibited transaction. This is not to say that you shouldn’t make investment decisions for your assets—for example, if you own a rental property in your IRA, you may make the decision that the carpet needs to be replaced, but you can’t do the work of replacing it. . My favorite analogy is that you can walk up behind the groundskeeper and tell him where to push the lawnmower, as long as you’re not pushing it yourself.
Never pay yourself or use self-directed IRA funds for personal gain. Basically, you never want the money that’s in your IRA to reach your pockets. If they do, you should pay taxes on them (except Roth) and they should be distributions. You cannot cover personal expenses with IRA funds, even if those expenses were incurred in the process of finding an investment.
Do not do business with companies in which you or your family have a vested interest. You should prevent your IRA from doing business with companies that you or a member of your family control, or companies in which you or members of your family have a substantial interest (more than 10%).