Common Prohibited Transactions that Trip Up Self-Directed IRA Owners

Common Prohibited Transactions that Trip Up Self-Directed IRA Owners

Imagine you’ve done it. You’ve built a successful Self-Directed IRA through sheer hard work, determination, and discipline for saving and investing. You’ve made solid investments, you’ve tracked their progress over time, and soon, you’ll be more financially independent than you ever thought possible. But then you get some news: one of your transactions was prohibited, which means stiff penalties from the IRS. Suddenly, you don’t have as much money as you thought. Fortunately, this situation is entirely preventable. You just have to know how to avoid common prohibited transactions. Let’s explore a few key tips for doing just that.

Don’t Buy Property from Yourself or Family Members in a Self-Directed IRA

One of the biggest mistakes Self-Directed IRA owners make is thinking they can transfer assets between their personal holdings and their IRA. You can’t sell a rental property you already own to your Self-Directed IRA, even if you price it at fair market value. You can’t buy property from your parents, your kids, or your spouse either.

The IRS defines disqualified persons with a broad brush. And it includes your immediate family members and their spouses. It also extends to anyone who provides services to your IRA, like your account custodian or financial advisor. The rule exists to prevent self-dealing, which is why the penalties are severe.

If you violate this rule, the IRS can disqualify your entire IRA. That means losing the tax-advantaged status of your account and facing immediate taxes and penalties on the full balance. Even if you think the transaction is fair and benefits everyone involved, the IRS doesn’t care about your intentions.

Don’t Use IRA-Owned Assets for Personal Benefit

Let’s say your Self-Directed IRA buys a beach house as a rental property. You can’t stay there for a weekend getaway, even in the off-season when it’s not rented. You can’t let your daughter use it during spring break. You can’t store your personal belongings in the garage or use it as a meeting space for your side business.

The property has to remain solely for the benefit of the IRA, not for you or any disqualified person. This rule extends beyond real estate, too. If your IRA owns a business, you can’t work for that business or draw a salary from it.

If your IRA buys physical gold or silver, you can’t store the metals in your home safe. The IRS views any personal use as a distribution, which triggers taxes, penalties, and potential disqualification of the account. It might feel frustrating when an asset you technically own through your IRA could solve a personal need, but crossing that line is one of the fastest ways to destroy your retirement savings.

Don’t Mix Personal and IRA Funds

Here’s where things get tricky for a lot of people. All expenses related to IRA assets have to be paid from the IRA, and all income from those assets has to flow back into the IRA. You can’t pay for property repairs with personal funds, even if you plan to reimburse yourself later.

You can’t deposit rental income into your personal checking account, even temporarily. Every dollar in and every dollar out has to go through the IRA. Some investors think they’re being helpful by covering an expense out of pocket when their IRA is low on cash, but that’s a prohibited transaction.

Of course, it helps to have an experienced Self-Directed IRA administration firm on your side—a firm with experience. Want to know more about managing your Self-Directed IRA the right way? Reach out to us at 866-7500-IRA today.

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