A self-directed IRA gives you the power to invest in alternative assets that can yield higher returns, an opportunity not allotted by a standard Traditional or Roth IRA. But the diverse portfolio of asset options doesn’t translate to an “anything goes” investment strategy.

Even self-directed IRA account holders must adhere to basic IRS guidance, including self-directed IRA prohibited transaction rules.

But what are self-directed IRA prohibited transactions, and how can you prevent them?  Here’s everything you need to know.


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What Is a Self-Directed IRA Prohibited Transaction?

The IRS defines a self-directed IRA (SDIRA) prohibited transaction as one in which the account owner, the fiduciary, or disqualified persons, which include the account holder’s family, engage in an inappropriate transaction.

Prohibited transactions are penalized with a tax on the transaction.

To learn more about prohibited transactions, we need to define what transactions are prohibited and who qualifies as a disqualified person.

Types of Self-directed IRA Prohibited Transactions

Prohibited transactions are specific to the type of retirement account you have. That means there are different sets of prohibited actions for qualified retirement plans, like a 401(k) and an IRA.

If you have an IRA, self-directed or otherwise, the following transactions are prohibited by the IRS:

  • Taking a loan from your IRA.
  • Using your IRA as a means to secure a loan.
  • Purchasing a self-directed IRA real estate for personal use.
  • Selling property directly to your IRA.
  • Using funds to invest in any prohibited asset, which includes S-Corporations, collectibles, life insurance, and alcohol.
  • Performing any type of work, such as remodeling a property, to a property on your own–also known as “sweat equity.”

Who is a disqualified person?

A disqualified person is an individual the IRS identifies as someone barred from engaging in a transaction with your IRA.  The following individuals are considered disqualified persons:

  • The plan’s fiduciary or someone trusted to manage the IRA account.
  • An employer whose employees are covered by the retirement plan.
  • An employee organization that includes members covered by the IRA.
  • Any individual who provides services to your retirement plan.
  • A family member of the account holder, including spouses, lineal descendants, or ancestors.
  • Any entity of which a disqualified individual owns 50% interest.

The IRS also has specific rules that define when an individual is disqualified in the context of business owners, corporations, trusts, shareholders, and estates based on the level of direct or indirect involvement. For a full list of disqualified persons related to small business, see IRS Publication 560.

7 Examples of Self-Directed IRA Prohibited Transactions

  1. Buying or selling a property to or from your SDIRA. For instance, if you decide to purchase an apartment or rental property with your SDIRA, you cannot then purchase the apartment from the IRA.
  2. Purchasing property for a disqualified person. If you want to purchase a property for your child, either as a residence or an investment, you cannot use IRA funds to do so.
  3. Combining SDIRA funds with personal savings to buy a property.  If you want to purchase property using your SDIRA, but you don’t have enough saved, you cannot combine your personal funds and your IRA funds to make the purchase.  There are mortgage opportunities to bridge the gap, but they are difficult to obtain.
  4. Lending money to a disqualified individual. While you can generally use your self-directed IRA to lend money,  you cannot lend money to a disqualified person, such as your spouse, child, or business owner by a disqualified person.
  5. Disqualified persons dwelling on your property. You can use SDIRA funds to purchase all types of property, including a rental home or office space, but you can’t use that property. Disqualified persons, such as a child, are also banned from use.
  6. Investing in a business owned by a disqualified person. SDIRA funds can be used to invest in businesses and start-ups you believe in, but you can’t use those funds if a disqualified person owns the business. In other words, you wouldn’t be able to use your SDIRA to help your daughter open a business.

What is the Penalty for a Prohibited Transaction

The initial penalty for a prohibited transaction is 15% of the transaction total in the tax period. The disqualified person can rectify the issue to avoid further penalties. However, if the prohibited transaction is not corrected within the taxable window, the IRS will tax the transaction at 100%.

If you engage in a prohibited transaction, the tax will depend on the value of the transaction and is the greater of either the “money and fair market value” of the property received or given. If the exchange of services triggered the prohibited transaction, the excess compensation received or given is taxed.

Understanding the rules that govern your self-directed IRA will help you avoid costly penalties and taxes that eat away at your returns. For any questions related to prohibited transactions, contact one of our specialists at Horizon Trust using our online portal or by calling 1-888-205-6036, Option 1.

Horizon Trust has a team of specialists ready to assist you. If you’re looking for a custodian with enough knowledge to ensure you stay within allowable IRS transactions, open an account with Horizon Trust today!


What is a fiduciary? 

A fiduciary is an individual or entity that manages your assets, monetary or property. If you have a standard IRA, the bank or custodian is considered the fiduciary, but that’s not the case with SDIRAs.  SDIRA custodians handle the administrative needs of your account, but they do not manage the account or make decisions regarding your investments. As such, they are not considered the fiduciary.

What is the consequence of a prohibited transaction? 

If you engage in a prohibited transaction, you will face a 15% tax penalty, the amount of which is based on the value of the transaction. If you do not remedy the situation, you will be required to pay a 100% penalty on the value of the transaction.