In general, the type of transactions that could fall under the prohibited transaction rules pursuant to Internal Revenue Code Section 4975 can be viewed in the context of three categories:

Direct Prohibited Transactions

4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified person”

  • Ben leases an interest in a piece of property owned by his Self-Directed IRA to his son
  • Jen sells real estate owned by her Self-Directed IRA to her father
  • Todd sells real estate he owns personally to his Self-Directed IRA
  • Carl transfers property he owns personally to his Self-Directed IRA
  • Mary Purchases real estate with her IRA funds and leases it to her mother
  • Kevin uses his Self-Directed IRA funds to purchase an interest in an entity owned by his wife
  • Peter Transfers property he owns personally subject to a mortgage to his Self-Directed IRA.
  • Tracy uses personal funds to pay expenses related to her Self-Directed IRA real estate investment
  • Lara uses personal funds to pay taxes and expenses related to her Self-Directed IRA real estate investment

4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”

  • Keith lends his son $4,000 from his IRA
  • Joe Uses the assets of his Self-Directed IRA as security for a loan
  • Mr. Peek and Mr. Fleck personally guarantee a business loan owned by their Self-Directed IRA
  • Tammy personally guarantees a bank loan to her Self-Directed IRA
  • Bill uses his personal assets as security for an Self-Directed IRA investment
  • Allan uses Self-Directed IRA funds to lend an entity owned and controlled by his father $25,000
  • Terry acquires a credit card for his Self-Directed IRA LLC bank account

4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”

  • Dan purchases real estate with his Self-Directed IRA funds and personally makes repairs on the property
  • Larry purchases a condo with his Self-Directed IRA funds and paints the walls without receiving a fee
  • Kris buys a piece of property with his Self-Directed IRA funds and hires his son to work on the property
  • Karen buys a home with her Self-Directed IRA funds and her son makes repairs for free
  • Lisa owns an office building with her Self-Directed IRA and hires her son to manage the property for a fee
  • Shari owns an apartment building with her Self-Directed IRA funds and has her father manage the property for free
  • Joe receives compensation from his Self-Directed IRA for investment advice
  • Troy acts as the real estate agent for his Self-Directed IRA

4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA

  • Steve uses a house owned by his Self-Directed IRA for personal uses
  • Tim deposits Self-Directed IRA funds in to his personal bank account
  • Pat is in a financial jam and takes $12,000 from his Self-Directed IRA to pay a personal debt
  • Mark buys precious metals using his Self-Directed IRA funds and uses them for personal gain
  • Jack purchases a vacation home with his Self-Directed IRA funds and stays in the home on occasion
  • Amy buys a cottage on the lake using her Self-Directed IRA and rents it out to her daughter and son-in-law
  • Sylvia purchases a condo on the beach with her Self-Directed IRA funds and lets her son use it for free
  • Richard uses his Self-Directed IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Richard and transfers those funds back to Richard
  • Pam invests her Self-Directed IRA funds in an investment fund and then receives a salary for managing the fund.
  • Charles uses his Self-Directed IRA funds to purchase real estate and earns a commission as the real estate agent on the sale
  • Keith uses his Self-Directed IRA funds to lend money to a company he owns and controls
  • John invests his Self-Directed IRA funds into a business he owns 75% of and manages

Self-Dealing Prohibited Transactions

4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account

  • Sara makes an investment using her Self-Directed IRA funds into a company she controls which will benefit her personally
  • Jason uses his Self-Directed IRA funds to invest in a partnership with himself personally in which he and his family will own greater than 50% of the partnership
  • Helen uses her Self-Directed IRA funds to invest in a business she and her husband own and operates and her and her husband earns compensation from the business
  • Steve uses his Self-Directed IRA funds to lend money to a business in which he controls and manages
  • Victor invests his Self-Directed IRA funds in a Trust in which Victor and his wife would gain a personal benefit
  • Brenda uses her Self-Directed IRA funds to invest in a real estate fund managed by her Son. Brenda’s son receives a bonus for securing her investment.
  • Frank invests his Self-Directed IRA funds into a real estate project that his development company will be involved in order to secure the contract
  • Ryan uses his Self-Directed IRA funds to invest in his son’s business that is in financial trouble
  • David uses his Self-Directed IRA funds to buy a note on a piece of property for which he is the

Conflict of Interest Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:

4975(c)(1)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA

  • Jay invests his Self-Directed IRA funds into a corporation in which he manages and controls but owns a small interest inBetty uses her Self-Directed IRA funds to loan money to a company she owns a small interest in but manages and controls the daily operations of the company
  • Sally uses her Self-Directed IRA to lend money to a business that she works for in order to secure a promotion
  • Lance uses his Self-Directed IRA funds to invest in a real estate fund that he manages and where his management fee is based on the total value of the fund’s

It is highly advisable to consult with a tax attorney or tax professional, specifically one with a strong understanding of the IRS prohibited transaction rules, before using a Self-Directed IRA to invest in a private business.

To learn more about using the IRS prohibited transaction rules, please contact a Self-Directed retirement expert at 1-800-472-1043.