IRA Prohibited Transactions and Disqualified Persons: The Complete Rules

IRA prohibited transactions are deals between your IRA and you, your family, or other insiders that federal law forbids. Get one wrong and the IRA owner can lose the account’s tax advantaged status for the entire year, with income tax on the whole balance.

The risk rises when an IRA holds real estate, private companies, notes, or anything else the IRA owner controls directly. IRS Publication 590-A says so: “If your IRA is invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased.”

This reference page explains the prohibited transaction rules for IRA prohibited transactions from the statute up. It covers the six categories in section 4975(c)(1) of the Internal Revenue Code, the full disqualified person definition, the deemed distribution, excise taxes, Labor Department exemptions, and the Tax Court cases. Examples marked “illustrative” are hypothetical and simplified.

Sources: Internal Revenue Code sections 408 and 4975, IRS Publication 590-A, the IRS prohibited transactions page, Form 5330 instructions, Labor Department regulations, and published Tax Court and appellate opinions.

What does prohibited transaction mean?

Publication 590-A defines a prohibited transaction in plain words as “any improper use” of your traditional IRA by you, your beneficiary, or any disqualified person. The same rules apply to Roth IRAs, SEP IRAs, and SIMPLE IRAs.

The legal definition is in section 4975 of the Internal Revenue Code. Section 4975(e)(1) lists individual retirement accounts as a “plan,” so the same prohibited transaction rules that govern an employee benefit plan also govern your IRA.

Two features of the prohibited transaction rules matter more than any other:

• Every category is “direct or indirect.” Running a deal through an IRA-owned company, a relative, or a nominee doesn’t avoid the rules.
• Most categories apply to a transaction “between a plan and a disqualified person.” If no disqualified person is involved, the transaction usually isn’t prohibited, though it may still be a bad investment.

Prohibited transactions vs. permitted investments

People often mix up prohibited transactions and prohibited investments. Prohibited transactions are about who is on the other side of a deal. A prohibited investment is about what the IRA holds.

The IRS investments FAQ says “there is no list of approved investments.” The code limits only a few asset types. Section 408(a)(3) bars life insurance. Section 408(m) treats the purchase of a collectible, such as art, rugs, antiques, gems, stamps, most coins, and alcoholic beverages, as a distribution of its cost, with an exception for certain coins and bullion held by a trustee. Those are limits on IRA investments, not prohibited transactions.

Everything else is among the permitted investments for retirement accounts, as long as your custodian allows it and no disqualified person is involved in a way the statute forbids.

The prohibited transaction rules: six categories in section 4975(c)(1)

Section 4975(c)(1) defines prohibited transactions as any direct or indirect:

• (A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
• (B) lending of money or other extension of credit between a plan and a disqualified person;
• (C) furnishing of goods, services, or facilities between a plan and a disqualified person;
• (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
• (E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
• (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

The first four are transaction rules that apply to any disqualified person. The last two are the self dealing rules that apply to fiduciaries, and for most self directed IRA owners, that means the IRA owner personally.

Sales, exchanges, and leases: 4975(c)(1)(A)

Any direct or indirect sale of property between your IRA and a disqualified person is prohibited. That covers selling property to the IRA, buying property from it, and leasing in either direction. These are common prohibited transactions in real estate.

Price doesn’t matter. The prohibited transaction rules don’t ask whether the deal was fair. A sale at adequate and full consideration is still a prohibited transaction if the buyer and seller are your IRA and a disqualified person. The Eighth Circuit, in Ellis, noted that such transactions are prohibited even if made in good faith or beneficial to the plan.

Section 4975(f)(3) adds a trap for real estate. If a disqualified person transfers property to the IRA subject to a mortgage the IRA assumes, or a mortgage placed on it within the prior 10 years, the transfer is treated as a sale.

Illustrative example: An IRA owner sells a duplex he or she owns to his or her IRA at an appraised price. The IRA purchased the property from a disqualified person, so it’s a sale under 4975(c)(1)(A), whatever the appraisal says.

Loans and extensions of credit: 4975(c)(1)(B)

Your IRA can’t lend money to a disqualified person, and a disqualified person can’t lend money to the IRA. “Extension of credit” reaches further than a loan: it includes guaranties, as the Peek and Thiessen cases show below.

Illustrative example: An IRA owner’s self directed IRA holds cash. His son needs $40,000 for a business. If the plan lent funds to the son, even at a market interest rate with a signed note, it would be one of the prohibited transactions under (B), because a lineal descendant is a disqualified person.

Publication 590-A lists borrowing money from your IRA and using it as security for a loan among its examples. Under section 408(e)(4), if you pledge part of an IRA as security, that portion is treated as distributed to you.

Goods, services, and facilities: 4975(c)(1)(C)

A disqualified person can’t furnish goods, services, or facilities to the IRA, and the IRA can’t furnish them to a disqualified person. This is where “sweat equity” fails.

Illustrative example: An IRA owns a rental house. The IRA owner’s daughter, a licensed electrician, rewires it, and the IRA pays her a normal rate. That’s a prohibited transaction: furnishing services between a plan and a disqualified person.

Section 4975(d)(2) carves out one reasonable arrangement: a contract with a disqualified person for office space or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid. That covers services to the IRA itself, such as a custodian’s administration, not services to an investment the IRA owns.

Transfer or use of plan income or assets: 4975(c)(1)(D)

This category catches any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.

Using IRA assets yourself is one version. Publication 590-A’s examples include buying property for personal use, present or future, with IRA funds.

Illustrative example: A self directed IRA buys a lake cabin as an investment. The IRA owner’s parents stay there for a week, rent-free. That’s a prohibited transaction under (D): use of IRA assets by disqualified persons.

Fiduciary self dealing: 4975(c)(1)(E)

A fiduciary can’t deal with IRA income or assets “in his own interest or for his own account.” This is the core of the self dealing principles applicable to anyone who controls IRA investments. Ellis turned on these self dealing rules.

Because the IRA owner who directs investments is a fiduciary, this rule turns any decision made in the IRA owner’s own interest or for the owner’s own account into a possible violation, even if no other disqualified person is involved. In Ellis, wages paid to the IRA owner by a company his IRA controlled were both a (D) transfer and an (E) act of self dealing. The self dealing principles applicable to fiduciaries reach indirect benefits too.

Illustrative example: An IRA owner directs his IRA to invest in a company on the condition that the company hires his wife. The investment is made in his own interest, not solely the IRA’s, which raises the indirect self dealing principle under (E).

Kickbacks to fiduciaries: 4975(c)(1)(F)

The second of the self dealing rules bars a fiduciary from receiving consideration for his own personal account from any party dealing with the plan in connection with a transaction involving IRA income or assets. A finder’s fee, commission, or gift paid to the IRA owner by a promoter for steering IRA money into a deal fits here.

Illustrative example: A promoter pays an IRA owner a $2,000 “referral bonus” after the IRA owner moves $100,000 of IRA funds into the promoter’s note offering. The bonus is consideration from a party dealing with the plan, so it’s a prohibited transaction under (F).

Who is a disqualified person?

The full disqualified person definition is in section 4975(e)(2). For an IRA, it reaches nine groups:

• (A) A fiduciary of the plan, which includes the IRA owner who directs investments.
• (B) A person providing services to the plan, such as the IRA custodian or trustee.
• (C) An employer whose employees are covered by the plan.
• (D) An employee organization whose members are covered.
• (E) A 50% or greater owner of an employer or employee organization described in (C) or (D).
• (F) A member of the family of anyone in (A), (B), (C), or (E).
• (G) A corporation, partnership, trust, or estate that is 50% or more owned, directly or indirectly, by anyone in (A) through (E).
• (H) An officer, director, 10% or more shareholder, or highly compensated employee of a person in (C), (D), (E), or (G).
• (I) A 10% or more partner or joint venturer of a person in (C), (D), (E), or (G).

Groups (C), (D), and (E) relate to employers, so they matter mainly for SEP and SIMPLE IRAs. For a typical self directed IRA, the key groups are the IRA owner, the owner’s family, service providers, and entities the owner and family control.

Fiduciaries: why the IRA owner is a disqualified person

Under section 4975(e)(3), a fiduciary is anyone who exercises any discretionary authority or discretionary control over the plan’s management, exercises any authority or control over its assets, renders investment advice for a fee, or has discretionary responsibility in its administration.

If you choose how IRA assets are invested, you’re a fiduciary. The Tax Court found exactly that in Peek, where the taxpayers had “retained all authority and control” over their IRAs. In Ellis, the Eighth Circuit called it undisputed that the IRA owner was a disqualified person as a fiduciary.

A paid investment adviser to the IRA can also be a fiduciary.

Family members

Section 4975(e)(6) defines family as a spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. In practice that means:

• Your spouse. The IRA’s owner’s spouse is a disqualified person in every case, including in deals with a spouse’s business.
• Parents, grandparents, and great-grandparents.
• Children, grandchildren, and great-grandchildren.
• Spouses of children and grandchildren.

Siblings, aunts, uncles, nieces, nephews, cousins, and in-laws other than a descendant’s spouse are not on the list. A deal with your brother isn’t automatically prohibited. But if the benefit flows to you or a disqualified person indirectly, (D) and (E) can still apply.

Entities you control

Under (G), a corporation, partnership, trust, or estate is a disqualified person if disqualified persons in (A) through (E) own 50% or more of it, directly or indirectly. Section 4975(e)(4) and (5) apply constructive ownership rules, so stock held by your family members counts toward the test.

Illustrative example: The IRA owner and his wife together own 60% of a property management company. The company is a disqualified person. If the IRA hires it to manage IRA real estate, the IRA purchased services from a disqualified person, a prohibited transaction under (C).

When the IRA’s own company becomes a disqualified person

An entity the IRA owns can become a disqualified person too. In Swanson v. Commissioner, the Tax Court noted that once an IRA owned the stock of a new corporation, the corporation became a disqualified person under (G). In Ellis, the parties agreed the IRA-owned LLC was a disqualified person because the IRA owner was its beneficial owner through the IRA.

When an IRA holds a controlling equity position in a company, every transaction between that company and the IRA owner or family needs the same scrutiny as a transaction with the IRA itself.

An investment in a third party controlled entity, where neither the IRA owner nor family owns 50% or more, isn’t with a disqualified person under (G). That lowers the risk, but it doesn’t end it. If the IRA owner gets a personal benefit from the IRA’s investment, (D), (E), or (F) can still apply under the indirect self dealing principle.

How the IRA owner’s prohibited transactions are taxed

The consequences of prohibited transactions depend on who engaged in them. These are serious tax consequences either way.

If the IRA owner or beneficiary engages: the entire IRA is distributed

Section 408(e)(2)(A) says that if the individual for whose benefit the IRA was established, or a beneficiary, engages in any prohibited transaction, the account “ceases to be an individual retirement account as of the first day of such taxable year.”

Section 408(e)(2)(B) then treats the account as distributing the fair market value of all its assets on that first day. The account is not an IRA anymore, and the entire IRA balance, not just the amount involved, is taxable.

Additional costs can follow:

• Income tax on the deemed distribution, as taxable income for the year.
• A 10% additional tax if the IRA owner is under age 59½, unless an exception applies. The tax applied in both Ellis and Thiessen.
• An accuracy-related penalty under section 6662, which applied in Peek and Ellis.
• A longer audit window. In Thiessen, the six-year limitations period of section 6501(e) applied because the return didn’t disclose the transaction.

For a Roth IRA, the distribution is taxed under Roth distribution rules. Peek shows how badly that can go: the taxpayers had converted to Roth IRAs, but the accounts had stopped being IRAs years earlier, so the later gains were taxed.

Each IRA account stands alone

Section 408(e)(2)(A) treats each IRA separately. Publication 590-A says the same: if you have more than one IRA, a prohibited transaction in one doesn’t disqualify the others. That’s one reason some investors keep alternative assets in a separate self directed IRA, so a mistake under the prohibited transaction rules costs only that account.

If another disqualified person engages: excise taxes

Section 4975(c)(3) exempts the IRA owner and beneficiary from the 4975 excise tax when the account stops being an IRA under section 408(e)(2)(A), or when section 408(e)(4) treats a pledged portion as distributed. For the individual IRA owner, the deemed distribution replaces the excise tax.

If someone other than the IRA owner or beneficiary, such as a parent or the owner’s child, engages in a prohibited transaction, the IRA keeps its status. That disqualified person owes excise tax instead:

• 15% first-tier tax: Section 4975(a) imposes 15% of the amount involved for each year or part of a year in the taxable period. It’s paid by any disqualified person who participates, other than a fiduciary acting only as such.
• 100% second-tier tax: Section 4975(b) imposes 100% of the amount involved if the transaction isn’t corrected within the taxable period.

The taxable period runs from the date the prohibited transaction occurred to the earliest of the IRS mailing a notice of deficiency, the tax being assessed, or correction being completed. If more than one person is liable, liability is joint and several under section 4975(f)(1).

The amount involved is the greater of the money and fair market value of property given or received. For the 15% tax, value is measured on the date of the transaction. For the 100% tax, it’s the highest value during the taxable period.

Illustrative example: An IRA owner’s father leases a building from the IRA at a fair rent of $24,000 a year. If the amount involved for year one is $24,000, the first-tier tax for that year is 15%, or $3,600. If the lease isn’t corrected in time, the 100% tax applies on top.

Correction and Form 5330

For prohibited transactions by other disqualified persons, correction means “undoing the transaction to the extent possible,” while placing the plan in a financial position not worse than if the disqualified person had acted under the highest fiduciary standards.

A disqualified person who owes the section 4975 tax reports it on Form 5330. The instructions say the form is generally due by the last day of the 7th month after the end of the filer’s tax year, and that “plan” includes IRAs for these purposes.

What the Tax Court has decided

These are published decisions, with citations so you can read the opinions yourself.

Swanson v. Commissioner, 106 T.C. 76 (1996)

Mr. Swanson’s IRA purchased all the initial stock of a newly formed corporation he controlled. The IRS argued that the issuance of stock to the IRA, and later dividends, were prohibited transactions.

This was a ruling on litigation costs, not a full trial on whether prohibited transactions occurred. The Tax Court held the IRS’s position was not substantially justified. It said “a corporation without shares or shareholders does not fit within the definition of a disqualified person,” so the original issuance to the IRA was not a sale between a plan and a disqualified person. It also held the dividends didn’t violate the self dealing rules of 4975(c)(1)(E).

The court added that after the stock was issued, the corporation became a disqualified person. Swanson is often cited for forming a new entity with IRA money. It doesn’t shield prohibited transactions after formation.

Peek v. Commissioner, 140 T.C. 216 (2013)

Two IRA owners, Mr. Fleck and Mr. Peek, set up new IRAs in 2001, formed a corporation, and had the IRAs buy 100% of its newly issued stock. The corporation bought a business’s assets, partly with a $200,000 note to the sellers. Both IRA owners personally guaranteed that note.

The IRS argued the guaranties were prohibited transactions. The taxpayers argued the guaranty ran to the corporation, not to “the plan.”

The Tax Court held for the IRS. Section 4975(c)(1)(B) prohibits “any direct or indirect” extension of credit, and a narrower reading would let anyone avoid the rule “by having the IRA create a shell subsidiary.” Each guaranty was an indirect extension of credit to the IRAs.

The Tax Court held that the guaranties were a continuing prohibited transaction, so the accounts holding the stock stopped being IRAs as of the first day of 2001. When the stock was sold in 2006 from Roth IRAs, the gains were taxable, and accuracy-related penalties applied. The IRS successfully argued that the “indirect” language reaches guaranties of an IRA-owned company’s debt.

Ellis v. Commissioner, T.C. Memo. 2013-245, aff’d, 787 F.3d 1213 (8th Cir. 2015)

Mr. Ellis rolled about $319,500 of retirement savings into a self directed IRA, which took a 98% interest in a new LLC that sold used cars. He was general manager. The LLC paid him wages of $9,754 in 2005 and $29,263 in 2006.

The Tax Court held that the initial investment wasn’t a prohibited transaction, citing Swanson, because the LLC had no members when the IRA invested. But paying wages was a prohibited transaction. Because the IRA owner could direct his own compensation, he engaged in a transfer of IRA income or assets for his benefit under (D) and indirect self dealing under (E).

The Tax Court agreed with the IRS, which successfully argued the case again on appeal. It rejected the argument that the plan asset regulation’s “operating company” exception protected the wages, holding that rule can’t nullify the statute’s ban on indirect self dealing. It also held that section 4975(d)(10), which allows reasonable compensation for services to the plan, didn’t apply, because Mr. Ellis was paid for managing the business, not for services to the IRA.

The Tax Court deemed the IRA distributed as of January 1, 2005. Its year-end value was $321,253. The deficiency was $135,936, plus the 10% additional tax and a penalty. Ellis shows why any compensation creates risk when an IRA-owned company pays the IRA owner.

Thiessen v. Commissioner, 146 T.C. 100 (2016)

The Thiessens rolled $432,076.41 of retirement funds from workplace retirement plan accounts into new self directed IRAs in 2003. The IRAs bought all the initial stock of a new C corporation, leaving IRA shareholders as its only owners. The corporation bought a business’s assets, including with a $200,000 seller note that the Thiessens personally guaranteed.

The IRS successfully argued the same theory as in Peek, and the Tax Court agreed: each guaranty was a prohibited transaction pursuant to section 4975(c)(1)(B), as an indirect extension of credit. The Tax Court deemed the IRAs distributed on January 1, 2003.

The taxpayers also argued that section 4975(d)(23) excused them. The Tax Court concluded that exemption, which deals with correcting certain securities or commodities credit transactions, didn’t apply. The 10% additional tax applied, and so did the six-year limitations period, because the return didn’t adequately disclose the guaranties.

The opinion also cited the Labor Department’s plan asset rule, 29 CFR 2510.3-101(h)(3): when a plan owns all the equity interests in an entity, plan assets include the entity’s underlying assets. IRA assets held through a wholly owned company are still IRA assets.

McNulty v. Commissioner, 157 T.C. No. 10 (2021)

This isn’t a prohibited transaction case, but it shows a related risk. IRA owners used IRA-owned LLCs to buy American Eagle coins and kept them at home.

The Tax Court held that taking physical possession of the coins was a taxable distribution and imposed accuracy-related penalties. It noted that an IRA may invest in a single member LLC, citing Swanson and Ellis, but the owners’ physical possession of the coins was a distribution.

Across these cases, the Tax Court held for the IRS whenever the IRA owner got a personal benefit or put personal credit behind the investment. In none of them was forming the new entity held to be the violation. What happened next was.

Statutory and DOL exemptions

Not every transaction with a disqualified person breaks the prohibited transaction rules. There are two sources of relief.

Statutory exemptions in section 4975(d)

Section 4975(d) lists exemptions. Those most relevant to IRAs include:

• (d)(2): a contract or reasonable arrangement for office space or services necessary to operate the plan, at reasonable compensation.
• (d)(9): receipt of benefits by a disqualified person as a participant or beneficiary, under the plan’s terms.
• (d)(10): receipt of reasonable compensation for services rendered, or reimbursement of expenses, in the performance of duties with the plan.

Section 4975(f)(6) limits some exemptions for owner-employees, and section 4975(f)(6)(B)(i)(II) treats an IRA owner as an owner-employee for that purpose. Ellis shows how narrow (d)(10) is in practice. Outside that exemption, compensation creates risk.

Publication 590-A also notes two allowed exceptions. A bank may give a small payment for opening an account: up to $10 for a deposit of less than $5,000, or $20 for $5,000 or more. Services at reduced or no cost may also be allowed if certain conditions are met.

Class and individual exemptions from the Labor Department

Under Reorganization Plan No. 4 of 1978, the Labor Department, not the IRS, has primary authority to interpret section 4975 and grant exemptions. Section 4975(c)(2) directs that a prohibited transaction exemption be granted only if it is:

• administratively feasible,
• in the interests of the plan and its participants and beneficiaries, and
• protective of their rights.

Publication 590-A notes the Labor Department can grant class exemptions for certain transactions and individual exemptions for specific ones.

How to apply for a prohibited transaction exemption

The Labor Department’s administrative rules for exemptions are in 29 CFR part 2570, subpart B. The administrative rules apply to IRAs and employer plans alike. Key steps:

• Who may apply: a party in interest or a plan may apply for an individual exemption. An association or organization may apply for a class exemption.
• Complete application: an incomplete application won’t be considered, and the rules list the required contents.
• Pending class exemptions: an individual application generally won’t be considered while a class exemption covering the same transaction is pending.
• Tentative denial: the applicant gets 20 days to request a conference or submit more information, and 40 days to submit it.
• Notice: interested persons must be notified, and a proposed exemption is published in the Federal Register.
• Effect: a granted exemption covers only the named parties and the conditions stated, and it’s effective only if the facts in the application were true and complete.

The process takes time and professional help. It’s designed for a proposed transaction, before it happens.

Common prohibited transactions: examples

These short scenarios are illustrative and simplified. The facts in real cases matter.

• Sale of your own rental property to your IRA: prohibited, under (A).
• Stock the IRA purchased from a company you and your spouse own 60% of: prohibited, under (A), because that company is a disqualified person under (G).
• Your IRA’s rental property leased to your son: prohibited, under (A) and (D).
• Lending IRA money to your daughter’s business, owned 100% by her: prohibited, under (B).
• Personally guaranteeing a loan to your IRA or its LLC: prohibited, under (B), as in Peek and Thiessen.
• Paying an IRA expense from your personal checking account: can be an extension of credit or a transfer, depending on the facts.
• Doing repairs yourself on IRA real estate: prohibited furnishing of services, under (C).
• An IRA-owned company paying you a salary: prohibited, as in Ellis, where the IRA held a controlling equity position.
• An IRA investing in a third party controlled entity: usually not with a disqualified person, but check for any personal benefit.
• Using an IRA-owned vacation home for a weekend: prohibited use of plan assets, under (D).
• A fee from a promoter for steering your IRA into a deal: prohibited, under (F).
• A personal direct investment alongside your IRA in the same deal, where your personal investment depends on the IRA’s: raises indirect self dealing questions under (E).

The last example has no bright line. Co-investing alone isn’t listed in the statute, but if the IRA’s money is used to benefit your personal direct investment, the self dealing principles apply.

What are some examples of prohibited transactions under ERISA?

ERISA, the federal law covering employer plans, has a parallel list in its section 406. Courts treat ERISA’s “party in interest” as analogous to the tax code’s disqualified person, as the Eighth Circuit noted in Ellis. Examples include a plan’s sale of property to the employer, lending plan money to an officer, or paying a fiduciary’s personal company for services beyond what the rules allow.

The Supreme Court’s decision in Commissioner v. Keystone Consolidated Industries, 508 U.S. 152 (1993), read the “direct or indirect” language broadly. Peek and Ellis both relied on it.

How to avoid prohibited transactions under IRS rules: a checklist

Before any IRA transaction involving an alternative asset, run a proposed transaction through these questions to screen it against the prohibited transaction rules. They don’t replace advice, but they catch the common traps.

• Who is on the other side? Check every person and entity against the disqualified person list, including entities 50% owned by you or family.
• Who benefits? If you or a family member benefit personally, now or later, stop.
• Who’s paying? Every expense must be paid from IRA funds, never personal funds.
• Where does income go? All income goes back to the IRA or its entity.
• Is anyone guaranteeing debt? No personal guaranty for IRA debt, ever.
• Is anyone being paid? No compensation from the IRA or its entities to you or a family member.
• Who uses the asset? No personal use of IRA assets by disqualified persons.
• Does it fit an exemption? If you’d rely on one, confirm it in writing with a tax attorney.
• Is it documented? Keep records showing each deal was made for the IRA alone.

What to do if a prohibited transaction occurred

If a prohibited transaction occurred in your IRA, act quickly and get professional help. The fix depends on who engaged in it.

If the individual IRA owner engaged in it, the account is treated as distributed as of January 1 of that year. A traditional IRA loses its tax deferred status for the whole account. The IRA trustee or custodian reports distributions on Form 1099-R, and you report the income. Undoing the transaction doesn’t restore the account’s tax exempt status: from the first day of that year, the account is not an IRA.

If another disqualified person engaged, correction under section 4975(f)(5) and filing Form 5330 are the main steps. The sooner correction is completed, the shorter the taxable period.

IRA prohibited transactions FAQ

What is the penalty for a prohibited transaction?

For the IRA owner, the account loses its tax advantaged status and the entire IRA is treated as distributed on January 1 of that year, with income tax and possibly a 10% additional tax and penalties. For other disqualified persons, the excise tax is 15% of the amount involved per year, and 100% if not corrected.

What investments are prohibited in an IRA?

Life insurance can’t be held in an IRA, and most collectibles are treated as distributions. Beyond that, the IRS has no list of approved or banned IRA investments. Most problems come from prohibited transactions, not from the asset itself.

Are siblings disqualified persons?

No. Siblings aren’t in the section 4975(e)(6) family definition. But a deal that indirectly benefits you can still be a prohibited transaction.

Can I buy property from my IRA when I retire?

Not while it’s inside the IRA. A sale between you and your IRA is a prohibited transaction. You can take the property as an in-kind distribution, which is taxed like any other distribution.

Is my IRA custodian a disqualified person?

Yes, as a person providing services to the plan. The reasonable compensation it receives for those services is covered by the section 4975(d)(2) exemption.

Does a fair price make a deal with family OK?

No. A sale or lease between the IRA and a disqualified person is a prohibited transaction regardless of price, even at adequate and full consideration.

Does the IRS approve self directed IRA investments?

No. IRS rules don’t include an approval process, and the Commodity Futures Trading Commission has warned about promoters who claim otherwise.

Can I get approval for a proposed transaction?

Not from the IRS, and not from a self directed IRA custodian. The formal route is a prohibited transaction exemption from the Labor Department, applied for under 29 CFR part 2570 before the deal happens. It’s slow, it requires a complete application, and a granted exemption covers only the parties and facts it describes.

Can I benefit personally from IRA assets before I take a distribution?

No. Any direct or indirect benefit to you or another disqualified person from IRA income or assets can be a prohibited transaction under (D) or (E). Section 4975(d)(9) allows the benefits you receive as a participant or beneficiary under the plan’s terms, which for an IRA means distributions.

Related guides on IRA funds and retirement accounts

See our self-directed IRA hub, self-directed IRA custodians, real estate IRA, checkbook IRA, crypto IRA, UBIT in an IRA, IRA investment options, and early withdrawal exceptions.

The bottom line

The prohibited transaction rules come down to one idea: the IRA must deal only for its own benefit, never yours or your family’s. Before you commit retirement savings to any IRA transaction, check every party, every payment, and every benefit, and treat “indirect” as broadly as the courts do.

Written by Tim Schmidt and reviewed for tax and account accuracy by Sean Webster, CPA. Last reviewed November 10, 2026 (America/New_York). This guide is for general education. It is not tax, legal, or investment advice, and it is not a recommendation to buy or sell any asset or to open any account. IRAInvesting.com is not a custodian, dealer, broker-dealer, or investment adviser. Before you act, talk with a licensed tax professional, tax attorney, or adviser who can review your situation. Alternative assets can be illiquid and volatile, and a directed custodian does not vet or endorse your investment. Investing involves risk, including the possible loss of principal.