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Common Prohibited Transactions of a Self-Directed Roth IRA

Categories of Prohibited Transactions

In general, the type of transactions that could 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 her 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 an 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 Prohibited 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 Prohibited 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.

For more information on prohibited transactions, please contact an IRA Experts at 800-472-0646.

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Posted in Self-Directed IRA