A prohibited transaction is any direct or indirect transaction between your IRA and a disqualified person (you, your spouse, parents, children, or entities you control). Common violations include self-dealing (buying property for personal use), lending IRA money to yourself or family, and hiring disqualified persons to service IRA assets. Penalties start at a 15% excise tax and can escalate to the entire IRA being treated as a taxable distribution.
- IRC Section 4975 defines all prohibited transactions for IRAs
- 15% excise tax on the amount involved, per year it goes uncorrected
- 100% penalty if the transaction isn't corrected within the taxable period
- The IRS can disqualify your entire IRA, triggering full income tax + 10% early withdrawal penalty
Self-directed IRAs give you incredible freedom — you can invest in real estate, precious metals, private equity, and more. But that freedom comes with a minefield of IRS rules. Break one, and your entire retirement account can be wiped out by taxes and penalties.
What the IRS Considers a Prohibited Transaction
Under IRC Section 4975, the IRS defines prohibited transactions as any direct or indirect:
Sale, exchange, or lease between your IRA and a disqualified person
You cannot sell personal property to your IRA, buy IRA property for yourself, or lease IRA assets to/from any disqualified person.
Lending money or extending credit between your IRA and a disqualified person
Your IRA cannot lend money to you, your family, or your business. You also cannot use IRA assets as collateral for a personal loan.
Providing goods, services, or facilities between your IRA and a disqualified person
You cannot do repair work on IRA-owned property yourself. Your children cannot manage IRA assets. All services must come from unrelated third parties.
Using IRA income or assets for the benefit of a disqualified person
You cannot stay in an IRA-owned vacation home, use IRA-owned equipment, or receive any personal benefit from IRA assets before distribution.
Transfer of IRA income or assets to a disqualified person
Paying yourself or a family member from IRA funds (other than proper distributions) is prohibited.
Who Are Disqualified Persons?
The IRS casts a wide net. A "disqualified person" includes far more people than most IRA owners realize:
| Category | Who's Included |
|---|---|
| You | The IRA owner |
| Spouse | Your husband or wife |
| Lineal Ascendants | Your parents, grandparents |
| Lineal Descendants | Your children, grandchildren, and their spouses |
| Fiduciaries | IRA custodian, trustee, investment advisor |
| Entities | Any corporation, partnership, trust, or estate in which you or a disqualified person owns 50% or more |
| Key Employees | Officers, directors, 10%+ shareholders, or highly compensated employees of entities involved |
Who Is NOT Disqualified
Penalties for Prohibited Transactions
The IRS does not mess around with prohibited transaction penalties. Here's what you're facing:
First-Tier Penalty: 15% Excise Tax
The IRS charges 15% of the "amount involved" for each year the prohibited transaction remains uncorrected. On a $100,000 deal, that's $15,000/year.
Second-Tier Penalty: 100% Excise Tax
If you don't correct the transaction within the taxable period, the penalty jumps to 100% of the amount involved. The IRS takes it all.
Nuclear Option: Full IRA Disqualification
The IRS can treat your entire IRA as distributed on January 1st of the year the prohibited transaction occurred. You owe income tax on the full balance, plus a 10% early withdrawal penalty if under 59½. On a $500k IRA, that could mean $200k+ in taxes and penalties.
5 Most Common Prohibited Transaction Mistakes
These are the mistakes self-directed IRA owners make most often — usually because nobody warned them:
1. Buying a Vacation Home with Your IRA
Your IRA buys a condo in Florida. You figure, "I'll rent it out most of the year, but I'll stay there two weeks in January." Prohibited. Any personal use of IRA-owned property — even one night — is a prohibited transaction. The property must be 100% investment, zero personal benefit.
2. Hiring Family to Manage IRA Property
Your IRA owns a rental house. You hire your son to manage it because he's a licensed property manager. Prohibited. Your son is a disqualified person. You must hire an unrelated third-party property manager, even if your kid would do a better job for less money.
3. Lending IRA Money to Your Business
Your small business needs a $50,000 bridge loan. Your IRA has the cash. Easy, right? Prohibited. Your IRA cannot lend money to you, your business, or any entity you control. Even if you pay it back with interest, the IRS considers it a prohibited transaction from day one.
4. Doing Your Own Repairs on IRA Property
The IRA-owned rental needs a new roof. You're a contractor, so you figure you'll save money by doing it yourself. Prohibited. Providing services (including "sweat equity") to IRA assets is self-dealing. You must pay an unrelated contractor with IRA funds.
5. Buying Collectible Coins in Your IRA
You want to hold rare coins in your Gold IRA. Most collectibles are prohibited. The IRS only allows specific bullion coins and bars that meet minimum fineness requirements (99.5% gold, 99.9% silver). Rare coins, artwork, antiques, gems, stamps, and most collectibles are banned from IRAs entirely.
How to Stay Safe
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How to Correct a Prohibited Transaction
If you realize you've made a prohibited transaction, act fast. The IRS allows correction if you:
- Undo the transaction — Reverse the sale, return the property, or repay the loan
- Make the IRA whole — Restore the IRA to the financial position it would have been in had the transaction never occurred
- File Form 5329 — Report the excise tax on your tax return
- Pay the 15% excise tax — Due for each year the transaction was outstanding
- Consult a tax attorney — Complex corrections may need professional guidance to avoid making things worse
Prohibited Transaction FAQs
What happens if I commit a prohibited transaction?
The IRS imposes a 15% excise tax on the amount involved for each year it remains uncorrected. If you don't fix it within the taxable period, the penalty jumps to 100%. In the worst case, the entire IRA can be treated as a distribution, meaning you owe income tax on the full balance plus a 10% early withdrawal penalty if you're under 59½.
Can I buy rental property with my IRA and live in it?
No. Using IRA-owned property for personal use is a prohibited transaction. You cannot live in the property, use it as a vacation home, let family members stay in it, or use it as a business office. The property must be purely an investment with no personal benefit to you or any disqualified person.
Can my IRA lend money to my business?
No. Lending IRA funds to yourself, your business, or any disqualified person is a prohibited transaction under IRC Section 4975. This includes direct loans, lines of credit, and using IRA assets as collateral for a personal loan.
Who exactly are disqualified persons?
Disqualified persons include: you (the IRA owner), your spouse, your parents, your children and their spouses, your grandchildren, any fiduciary of the IRA (custodian, trustee, investment advisor), and any entity you or a disqualified person owns 50% or more of (corporations, partnerships, trusts, estates).
Can I hire my son to manage my IRA-owned rental?
No. Your children are disqualified persons. Paying them to manage, maintain, or improve IRA-owned property is a prohibited transaction. You must hire unrelated third parties for all property management, repairs, and maintenance on IRA-owned real estate.
Avoid Costly IRA Mistakes
Augusta Precious Metals guides you through every compliance requirement. Your IRA stays clean, your metals stay protected.
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