IRS Rules

Self-Directed IRA Prohibited Transactions


 

 

All IRA accounts are subject to certain IRS rules and regulations. You, the IRA investor, get to enjoy the tax advantages granted to IRAs, HSAs, and other types of retirement accounts, as long as you follow the parameters set forth by the IRS for that account type; in addition to complying with the documentation practices of your IRA provider.

IRS rules regarding IRAs are dependent on which type of account you own (Traditional, Roth, SEP, etc.) and determine each account’s proceedings for contribution limits, distribution age and amount, prohibited transactions, and disqualified persons; among other things. The assets inside your account do not affect the IRS rules for your account.

Disqualified Persons


 

Every IRA has a list of persons and entities that are considered disqualified from interacting in certain ways with the IRA. IRS rules prohibit the IRA from dealing with these people and entities. These prohibited parties are called Disqualified Persons.
Disqualified persons to an IRA include the account holder and their spouse, as well as lineal ascendants and descendants (parents, children and their spouses, grandparents, grandchildren and their spouses), and certain fiduciaries (CPAs, Attorneys, Financial Planners, etc.).


BHR - IRA -Disqualified person Chart

Disqualified Persons to Your Plan are:

  • You
  • Your Spouse
  • Your Ascendants
  • Your Direct Descendants
  • Your Direct Descendants’ Spouses
  • Certain Fiduciaries (CPAs, Attorneys, Financial Planners, etc.)
  • IRAs held by Disqualified Persons
  • Entities owned or controlled by Disqualified Persons

Disqualified Persons Cannot:

  • Buy an asset from the retirement plan
  • Sell an asset to the retirement plan
  • Live in any property owned by the retirement plan
  • Rent property owned by the retirement plan
  • Personally use the retirement plan’s asset (for example, living in or renting out an IRA’s property)
  • Use personal finances to pay an IRA asset’s expenses
  • Handle money related to any IRA asset
  • Make improvements to an IRA asset (for example, cannot personally work on an IRA’s real estate property)
  • Take a commission on the purchase/sale of the IRA’s assets

Prohibited Transactions


Any transaction that takes place between an IRA and disqualified persons results in what is called a prohibited transaction.

Persons and entities that are disqualified from transactions with an IRA cannot buy or sell any asset from the plan; nor can they make personal use of an asset. Disqualified persons cannot live in or rent IRA-owned real estate, nor can they provide “sweat equity” to that property.

According to the IRS, other prohibited transactions between a plan and a disqualified person include the sale, exchange, or lease of assets, lending money, or extending credit; in addition to the furnishing of goods, services, or facilities relating to the plan’s assets. Retirement plans and entities owned or controlled by disqualified persons are prohibited from dealing with an IRA.

The IRS requires that IRA money is meticulously accounted for. A disqualified person may not pay for asset expenses from their personal finances. For IRA-owned assets, all income must flow back into the IRA, and all expenses must be paid from the IRA. Failure to maintain this funding structure may make your IRA subject to tax penalties, or even early distribution.

Disqualified persons to a plan may not take a commission on the purchase or sale of an asset. Ultimately, it is the IRS’s desire that disqualified persons should remain at arms-length from any IRA transactions. A disqualified person cannot be reimbursed by the IRA.

Fiduciaries must also follow strict IRS rules in regard to IRAs. Any act in which a disqualified person to an IRA uses the plan’s income or assets personally or in her or his best interest is a prohibited transaction. A fiduciary cannot hold a receipt of consideration for her or his personal account from any party dealing with the plan in a transaction that includes the plan’s income or assets.

 

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