Prohibited Transactions in IRAs: What Pitfalls to Avoid
IRAs are easy to setup and normally provide you a with a lot of freedom in terms of investment choices. However, there are limitations on what can and cannot be done. Specific prohibited transactions set forth by the IRS cannot be made with IRA funds. Doing so can cause your IRA to become disqualified, thus resulting in the IRA losing its tax-deferred status and potentially subject the entire value of the IRA as a taxable distribution. Here we will go over the prohibited transactions to avoid:
While many qualified retirement plans (401(k), 403b, 457, etc.) will offer loan options, IRAs are not allowed to make loans to any party, nor are they allowed to be placed as collateral for a loan.
Transferring ownership of property to an IRA either through buying, selling, or leasing is prohibited. A common example of individuals falling for this pitfall is purchasing real estate through an IRA and leasing the property to another individual.
Among the wide variety of asset classes available in the investment universe, collectibles are prohibited from purchase. Collectibles include:
- Alcoholic beverages
- Misc. tangible personal property
Despite coins being a prohibited transaction, the one exception is gold or silver coins minted by the US Treasury department though there is a cap on how much can be purchased.
Another common prohibited transaction is the purchase of life insurance through an IRA. Individuals tend to incorrectly purchase policies as an estate planning tactic. Depending on the situation, the use of a Life Insurance Trust may be the correct strategy to pursue.
As mentioned, IRAs are very flexible in terms of investment choices. If you are inclined on pursuing any of these transactions covered in this blog, consulting with a fee-only financial advisor can help you best plan for such financial goals to avoid any penalties or taxable issues.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.