Checkbook IRA Prohibited Transactions: What You Cannot Do (2026)
Critical IRS rules to avoid disqualifying your checkbook IRA—violations can cost you your entire retirement account.
Key Takeaways
- 1Prohibited transactions can disqualify your entire IRA retroactively
- 2Cannot transact with yourself, spouse, parents, children, or their spouses
- 3Cannot receive any personal benefit from IRA assets
- 4Cannot use IRA assets personally, even temporarily
- 5Cannot provide services to IRA for compensation
- 6Penalties are severe: entire IRA becomes taxable plus potential 10% penalty
What Are Prohibited Transactions?
IRC Section 4975 defines transactions that are forbidden between your IRA and disqualified persons:
- Sale, exchange, or leasing of property between IRA and disqualified person
- Lending money or extending credit between IRA and disqualified person
- Furnishing goods, services, or facilities between IRA and disqualified person
- Transfer of IRA income or assets to disqualified person
- Use of IRA assets by disqualified person for personal benefit
- Act by disqualified person who is fiduciary using IRA income/assets for own benefit
- Receipt of consideration by fiduciary for dealing with IRA assets
One Violation = Entire IRA Disqualified
Unlike tax deductions or other IRS issues where penalties apply to the specific transaction, prohibited transactions disqualify the ENTIRE IRA retroactively to January 1st of the violation year. This can turn a $500k IRA into a $500k taxable distribution instantly.
Who Are Disqualified Persons?
These people cannot transact with your checkbook IRA:
- You (the IRA owner)
- Your spouse
- Your lineal descendants: children, grandchildren, great-grandchildren (and their spouses)
- Your lineal ascendants: parents, grandparents (not siblings)
- Spouses of your children/grandchildren
- IRA custodian, trustee, or anyone providing services to the plan
- Entities you control: businesses where you own 50%+ or are officer/director
- Investment advisors managing the IRA
| Relationship | Disqualified? | Can IRA Transact? |
|---|---|---|
| You | Yes | No |
| Your spouse | Yes | No |
| Your children | Yes | No |
| Your grandchildren | Yes | No |
| Your parents | Yes | No |
| Your siblings | No | Yes—not disqualified |
| Your in-laws (spouse's parents) | No | Yes—not disqualified |
| Business partner (unrelated) | No | Yes—not disqualified |
| Your corporation (50%+ owned) | Yes | No |
Notably, siblings and in-laws are NOT disqualified persons
Common Prohibited Transaction Violations
Real-world examples of transactions that disqualify IRAs:
- Buying property from or selling to yourself or family
- Living in or personally using IRA-owned real estate
- Renting IRA property to children or parents
- Performing repairs yourself on IRA-owned property
- Using IRA funds to buy into your own business
- Lending IRA money to yourself or family
- Guaranteeing a loan for IRA investment
- Taking personal possession of IRA-owned gold or collectibles
- Receiving compensation for managing IRA assets
- Using IRA-owned property for personal benefit (storage, office, etc.)
Real Example: Audit Disaster
Jane used her checkbook IRA LLC to buy a rental property. Her son needed a place to live, so she rented it to him below market rate. IRS audit discovered this. Result: Entire $400k IRA disqualified on Jan 1 of that year, $400k taxable income, ~$140k tax bill plus 10% early withdrawal penalty ($40k). Total cost: $180k+ for helping her son.
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Penalties for Prohibited Transactions
The IRS imposes severe penalties for prohibited transactions:
- Disqualification: Entire IRA deemed distributed on Jan 1 of violation year
- Ordinary income tax: Full IRA balance added to taxable income
- Early withdrawal penalty: 10% additional tax if under 59½
- Excise tax: 15% excise tax on transaction amount in some cases
- No do-overs: Cannot reverse the transaction or fix it
- Future contributions: Cannot contribute to disqualified IRA
- Example: $500k IRA, 30% tax bracket, under 59½ = $200k tax cost
| IRA Balance | Tax Bracket | Under 59½? | Total Tax Cost |
|---|---|---|---|
| $100,000 | 24% | Yes | $34,000 (24% + 10%) |
| $250,000 | 32% | Yes | $105,000 (32% + 10%) |
| $500,000 | 35% | Yes | $225,000 (35% + 10%) |
| $500,000 | 35% | No | $175,000 (35% only) |
| $1,000,000 | 37% | Yes | $470,000 (37% + 10%) |
How to Stay Compliant
Strategies to avoid prohibited transactions:
- Document everything: Keep clear records of all transactions
- Third-party test: If unsure, ask "Would this be OK with unrelated third party?" If no, prohibited
- Avoid personal benefit: Never use IRA assets for personal gain, even indirectly
- Hire professionals: Use third-party property managers, contractors, accountants
- Market rate: All transactions must be at fair market value
- Consult experts: Talk to IRA attorney or CPA before unusual transactions
- Annual review: Review all transactions yearly for compliance
- Education: Take courses on self-directed IRA rules
- Custodian support: Work with providers offering compliance guidance
- When in doubt, don't: If transaction feels questionable, avoid it
Ignorance Is Not a Defense
The IRS does not care if you didn't know the rules. Unintentional prohibited transactions carry the same penalties as intentional ones. Before using checkbook IRA, invest significant time learning the rules or work with experienced advisors. The cost of one mistake can exceed the benefit of years of tax-deferred growth.
Gold IRA Prohibited Transactions
Precious metals in IRAs have specific prohibited transaction risks to avoid:
- Cannot take personal possession of IRA-owned gold—must use approved depository
- Cannot store gold at home or in personal safe deposit box
- Cannot buy gold from yourself or family members
- Cannot use gold as collateral for personal loan
- Work with reputable providers like Augusta Precious Metals who understand compliance
Frequently Asked Questions
1Can my IRA invest in my own business?
Generally no. If you own 50%+ of a business or are an officer/director, you are a disqualified person and the entity is disqualified. Your IRA cannot invest in disqualified entities. However, if you own less than 50% and have no control/fiduciary role, it may be permissible—consult an attorney.
2Can my IRA partner with me personally on a real estate investment?
No, this is a prohibited transaction. Your IRA cannot co-invest with you personally or any disqualified person. However, your IRA can partner with unrelated third parties, or you can have a spouse IRA that partners with your IRA (since they're separate entities).
3What if I accidentally violate and fix it immediately?
Unfortunately, intent doesn't matter. Even accidental, immediately corrected violations can result in full IRA disqualification. However, there is a Voluntary Correction Program (VCP) where you can apply to the IRS for forgiveness in exchange for fees and corrective action. Success isn't guaranteed.
4Can I hire myself to manage my IRA-owned rental property?
No, you cannot pay yourself a management fee from your IRA—that's a prohibited transaction. You can manage it yourself for free, or hire a third-party property manager for a fee. Many checkbook IRA investors self-manage to save costs.
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