In general, Self-Directed Roth IRA prohibited transactions can fall under the prohibited transaction rules pursuant to Code Section 4975 can be viewed in the context of three unofficial categories:
Direct Prohibited Transactions
4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between a Roth IRA and a “disqualified person”
- Ryan leases an interest in a piece of property owned by his Self-Directed Roth IRA to his son
- Mary sells real estate owned by her Self-Directed Roth IRA to her father
- Steve sells real estate he owns personally to his Self-Directed Roth IRA
- Kirk transfers property he owns personally to his Self-Directed Roth IRA
- Patty Purchases real estate with her Self-Directed Roth IRA funds and leases it to her son
- Mark uses his Self-Directed Roth IRA funds to purchase an interest in an entity owned by his father
- James Transfers property he owns personally subject to a mortgage to his Self-Directed Roth IRA.
- Amy uses personal funds to pay expenses related to herself Self-Directed Roth IRA real estate investment
- Marilyn uses personal funds to pay taxes and expenses related to her Self-Directed Roth IRA real estate investment
4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”
- Tony lends his son $4,000 from his Self-Directed Roth IRA
- Bill Uses the assets of his Self-Directed Roth IRA as security for a loan
- Tina personally guarantees a bank loan to her Self-Directed Roth IRA
- Bill uses his personal assets as security for a Self-Directed Roth IRA investment
- Mike uses Self-Directed Roth IRA funds to lend an entity owned and controlled by his father $25,000
- Dustin acquires a credit card for his Self-Directed Roth IRA LLC bank account
4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”
- Brooks purchases real estate with his Self-Directed Roth IRA funds and personally makes repairs on the property
- Howard purchases a condo with his Self-Directed Roth IRA funds and paints the walls without receiving a fee
- Zach buys a piece of property with his Self-Directed Roth IRA funds and hires his son to work on the property
- Kim buys a home with her Self-Directed Roth IRA funds and her son makes repairs for free
- Tracy owns an office building with her Self-Directed Roth IRA and hires her son to manage the property for a fee
- Harriet owns an apartment building with her Self-Directed Roth IRA funds and has her father manage the property for free
- Allan receives compensation from his Self-Directed Roth IRA for investment advice
- Sam acts as the real estate agent for his Self Directed Roth IRA
4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA
- Brad uses a house owned by his Self Directed Roth IRA for personal uses
- Dan deposits Self-Directed Roth IRA funds in to his personal bank account
- Richard is in a financial jam and takes $12,000 from his Self-Directed Roth IRA to pay a personal debt
- Charles buys precious metals using his Self-Directed Roth IRA funds and uses them for personal gain
- Andrew purchases a vacation home with his Self Directed Roth IRA funds and stays in the home on occasion
- Randy buys a cottage with her Self-Directed Roth IRA funds on the lake and rents it out to her daughter and son-in-law
- Emily purchases a condo using her Self-Directed Roth IRA on the beach and lets her son use it for free
- Spencer uses his Self-Directed Roth IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Spencer and transfers those funds back to Spencer
- Caroline invests her Self-Directed Roth IRA funds in an investment fund and then receives a salary for managing the fund.
- Felix uses his Self-Directed Roth IRA funds to purchase real estate and earns a commission as the real estate agent on the sale
- Justin uses his Self-Directed Roth IRA funds to lend money to a company he owns and controls
- Gary invests his Self-Directed Roth IRA funds into a business he owns 75% of and manages
Self-Dealing Transactions
4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account
- Pam makes an investment using her Self-Directed Roth IRA funds into a company she controls which will benefit her personally
- Ken uses his Self-Directed Roth IRA funds to invest in a partnership with himself personally in which he and his family will own greater than 50% of the partnership
- Angela uses her Self-Directed Roth IRA funds to invest in a business she and her husband own and operates and her and her husband earns compensation from the business
- Cameron uses his Self-Directed Roth IRA funds to lend money to a business in which he controls and manages
- Joe invests his Self-Directed Roth IRA funds in a trust in which Joe and his wife would gain a personal benefit
- Barbara uses her Self-Directed Roth IRA funds to invest in a real estate fund managed by her Son. Barbara’s son receives a bonus for securing her investment.
- Warren invests his Self-Directed Roth IRA funds into a real estate project that his development company will be involved in order to secure the contract
- Doug uses his Self-Directed Roth IRA funds to invest in his son’s business that is in financial trouble
- Patrick uses his Self-Directed Roth IRA funds to buy a note on a piece of property for which he is the debtor personally
Conflict of Interest Transactions
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:
4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA
- Jay invests his Self-Directed Roth IRA funds into a corporation in which he manages and controls but owns a small interest in
- Francine uses her Self-Directed Roth IRA funds to loan money to a company she owns a small interest in but manages and controls the daily operations of the company
- Carly uses her Self-Directed Roth IRA to lend money to a business that she works for in order to secure a promotion
- Scott uses his Self-Directed Roth IRA funds to invest in a real estate fund that he manages and where his management fee is based on the total value of the fund’s assets.
The Self-Directed Roth IRA gives investors the freedom to make alternative asset investments in a tax-free environment. However, it is important to work with qualified tax and ERISA specialists to avoid triggering common Roth IRA prohibited transactions.
