Prohibited IRA Transactions

 

In general, Internal Revenue Code Section 4975 defines a prohibited transaction as a transaction between a plan (your account) and a disqualified person. Generally, "disqualified persons" are defined to be the account holder, other fiduciaries, certain family members (lineal descendants and spouses of lineal descendants), and businesses under the account holder's (or disqualified person's) control. Transactions not allowed are:


1. A sale or exchange, or leasing of property between a plan and a related party.

2. Lending of money between a plan and a related party.

3. Furnishing goods, services or facilities between a plan and a related party.

4. Transfer to, or use by, a related party of the income or assets of a plan.

5. Act by a related party whereby he deals with the income or assets of a plan in his own interest or for his own account.

6. Receipt of any benefit for his own personal account by any related party in connection with a transaction involving the income or assets of the plan.


A disqualified person is you, your children, grandchildren, spouse, or parents. It is also any business owned 50% or more by any of the above. According to the IRS, siblings, aunts, uncles, cousins and step relations are not included in the definition of disqualified persons.

For further information please see U.S Department of Labor Class Exemptions

Essentially if your transaction is an arm’s length transaction that is a legitimate investment you can probably find similar exemptions that have been approved. For example if you wanted to loan money from your IRA to your wholly owned corporation it would probably be allowed if you charged your corporation the same interest rates your bank would charge.

To protect yourself you need a properly constructed Operating Agreement for your Self Directed IRA LLC.