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AdBits Episode 6 – Prohibited Transaction Rules

AdBits Podcast

IRA Financial’s Adam Bergman discusses the prohibited transaction rules when it comes to investing with a self-directed retirement account. These include the types of investments you can make, disqualified persons and how you are allowed to use retirement funds.




In This Podcast

If you don’t know what prohibited transactions are when it comes to retirement account investing, you could find yourself in hot water. Failure to comply with these rules may lead to the disqualification of your account, and all the tax advantages that come with it. This could ruin your retirement, cost you big time in taxes and penalties and worse. To stay IRS-compliant, it’s important you know and understand these rules.

The prohibited transaction rules came in to place when individuals would pass on their retirement savings to family members indefinitely, thus avoiding paying taxes. This is because the plans were funded with pre-tax funds and were never taxed.

There are three things you cannot do with a retirement account:

1. First, you cannot invest in life insurance with an IRA. While you can invest in it with a 401(k) if the plan allows, however it’s very limited.

2. Next, you cannot invest in most collectibles. This includes art, rugs and many coins. There is an exception to certain precious metals and coins, however you cannot personally hold the item itself. It should be kept at a depository or similar place.

3. Lastly, there are several provisions under Internal Revenue Code Section 4975. Essentially, you cannot make an investment involving a disqualified person.

To expand on the last point, a disqualified person includes you yourself, your spouse, any lineal ascendants and descendants, such as a parent or child, and any entity these individuals control. The retirement plan, such as an IRA, must exclusively benefit from an investment.

For example, if you own a stock and it goes up, your IRA goes up in value, however, you, the IRA owner, are not richer. The IRA is worth more, however, until you distribute those funds, you haven’t made a dime yet.

Here’s another example if you are a real estate investor. Let’s say you own a rental property with your Self-Directed IRA. You and any other disqualified person cannot benefit from the property. Therefore you cannot spend a day at the house. You cannot hire your father to make repairs. However, a non-disqualified person, such as a cousin or friend, is allowed. For example, you can hire your uncle to manage an apartment complex owned by your IRA.

Mr. Bergman cites many examples of prohibited transactions in this podcast. Be sure to give it a listen to have a better understanding of the prohibited transaction rules!

Stay In Touch

We always appreciate our listeners and we hope you will continue to listen and spread the word. You can find AdBits on SoundCloud, YouTube or your favorite streaming platform. Thanks for listening and if you have any topics you want to see covered, give us a call @ 800.472.0646 today!

Join us next episode as Mr. Bergman discusses the Solo 401(k) contribution rules and how you can super-save for retirement if you are self-employed.

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