Prohibited transactions in self-directed IRAs are defined under Section 4975 of the Internal Revenue Code. These transactions generally involve improper use of the IRA by the account owner or other disqualified persons, which can lead to the loss of the IRA’s tax-exempt status.
Prohibited transactions include any direct or indirect transfer of the income or assets of the IRA for the benefit of a disqualified person, such as the IRA owner. This includes receiving compensation for services provided to the IRA or using IRA assets for personal benefit.
Disqualified persons include the IRA owner, fiduciaries, and certain family members. Engaging in transactions with these individuals, such as buying or selling property, lending money, or providing services, constitutes a prohibited transaction. Some examples of prohibited transactions include receiving compensation or use of IRA assets for personal expenses.
Engaging in prohibited transactions results in the loss of the IRA’s tax-exempt status, and the entire value of the IRA may be treated as a taxable distribution.
In summary, prohibited transactions in self-directed IRAs primarily involve self-dealing and personal benefit derived from the IRA’s assets by disqualified persons. These transactions can lead to severe tax consequences, including the loss of the IRA’s tax-exempt status.