Self-Directed IRA Prohibited Transactions: The Complete List
One mistake can disqualify your entire IRA. Learn exactly what transactions are prohibited and how to stay compliant.
Key Takeaways
- 1Prohibited transactions can immediately disqualify your entire IRA
- 2Disqualified persons include you, family members, and related entities
- 3You cannot personally use or benefit from IRA assets
- 4Self-dealing is the most common violation
- 5Indirect prohibited transactions are just as dangerous
- 6Penalties include full distribution + 10% early withdrawal penalty
- 7Work with knowledgeable custodians to stay compliant
What Is a Prohibited Transaction?
A prohibited transaction is any improper use of your IRA account or assets by you (the account holder), your beneficiary, or any other "disqualified person." The IRS strictly enforces these rules to prevent people from using tax-advantaged retirement accounts for current personal benefit.
- Defined in IRC Section 4975 and ERISA Section 406
- Rules apply to ALL IRAs: Traditional, Roth, SEP, SIMPLE, Self-Directed
- Even unintentional violations count - ignorance is not a defense
- The entire IRA is treated as distributed if violated
- No cure period - damage is immediate upon violation
One Mistake = Total IRA Loss
Unlike most IRS rules, there's no partial penalty. A single prohibited transaction can cause your entire IRA to be treated as distributed, triggering immediate taxes on the full balance plus potential penalties.
Who Are Disqualified Persons?
Disqualified persons cannot engage in transactions with your IRA. The list is broader than most people realize.
- **You** (the IRA owner)
- **Your spouse**
- **Your lineal descendants** (children, grandchildren)
- **Parents and grandparents**
- **Spouses of lineal descendants**
- **Fiduciaries** (custodian, financial advisor to the IRA)
- **Entities you control** (50%+ ownership)
- **Entities family members control**
Who Is NOT Disqualified
Siblings, aunts, uncles, cousins, and friends are NOT disqualified persons. Your IRA can transact with them (subject to fair market value requirements).
Complete List of Prohibited Transactions
IRC Section 4975 specifically prohibits these transactions between an IRA and disqualified persons:
- 1Sale, exchange, or lease of property
- 2Lending money or extending credit
- 3Furnishing goods, services, or facilities
- 4Transfer or use of IRA income or assets
- 5Using IRA as security for a loan
- 6Receiving payment for personal services
Direct AND Indirect
These rules apply to both direct and indirect transactions. Using an intermediary or structuring around the rules still violates the law.
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Common Prohibited Transaction Examples
These real-world examples illustrate how easily violations occur.
- **Living in IRA-owned property**: Even one night in a vacation home owned by your IRA is prohibited
- **Using IRA funds to improve your property**: Your IRA buys rental house, you pay for repairs - prohibited
- **Lending to family**: Your IRA lends money to your son's business - prohibited
- **Personal services**: You manage an IRA-owned rental property yourself without compensation - prohibited (sweat equity)
- **Buying from yourself**: Selling your personal gold collection to your Gold IRA - prohibited
- **Pledging IRA as collateral**: Using IRA assets to secure a personal loan - prohibited
- **Paying yourself**: Receiving fees from your IRA for finding investments - prohibited
| Scenario | Prohibited? | Why |
|---|---|---|
| Your IRA buys rental property, you manage it for free | YES | Providing services to IRA |
| Your IRA buys gold, stored at IRS-approved depository | NO | Proper structure |
| Your IRA invests in your friend's business | NO* | Friends aren't disqualified (*arm's length) |
| Your IRA pays your son's LLC for property management | YES | Transaction with disqualified person |
| You stay overnight in IRA-owned vacation rental | YES | Personal use of IRA asset |
Consequences of Prohibited Transactions
The penalties are severe and immediate. There is no grace period or cure.
- **Full IRA distribution**: Entire IRA treated as distributed as of January 1 of violation year
- **Income tax**: Full balance becomes taxable income in year of violation
- **10% early withdrawal penalty**: If under 59½, additional 10% penalty applies
- **Loss of tax-deferred growth**: All future tax advantages eliminated
- **Excise tax**: 15% excise tax on amount involved (can rise to 100%)
Real Cost Example
You have a $500,000 self-directed IRA and violate the rules. At 35% tax bracket + 10% penalty, you'd owe $225,000 in taxes and penalties. Your $500,000 becomes $275,000 overnight.
How to Stay Compliant
Avoiding prohibited transactions requires constant vigilance, especially with self-directed IRAs.
- 1Work with experienced self-directed IRA custodians
- 2Never personally benefit from IRA assets in any way
- 3Keep IRA transactions completely separate from personal finances
- 4Hire third-party managers for IRA-owned businesses
- 5Document fair market value for all transactions
- 6Consult tax professionals before unusual transactions
- 7When in doubt, assume it's prohibited
Gold IRA Compliance Made Simple
Gold IRAs have additional rules beyond standard prohibited transaction rules. Working with reputable custodians ensures compliance.
- Gold must be stored at IRS-approved depository - not your home
- You cannot take personal possession of IRA gold
- Cannot sell your personal gold to your IRA (disqualified person transaction)
- Must use approved dealers and custodians
- Augusta and other top companies handle compliance for you
- Proper structure eliminates prohibited transaction risk
Frequently Asked Questions
1Can I fix a prohibited transaction if I made a mistake?
Unfortunately, there is no correction mechanism for most prohibited transactions. The damage is done the moment the transaction occurs. Some very limited exceptions exist for specific situations, but generally the IRA is disqualified immediately.
2Can my IRA invest in my business?
No. You are a disqualified person, so your IRA cannot invest in, lend to, or transact with any business you own (50%+ ownership). The same applies to businesses owned by your spouse, children, or parents.
3Can I store Gold IRA gold at home?
No. Taking personal possession of IRA gold is a prohibited transaction (personal use of IRA assets). Gold must be stored at an IRS-approved depository. "Home storage IRA" promotions are illegal.
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