You’ve diligently contributed to your IRA for years. You’ve watched it grow. You’ve planned your retirement around it.

Then, in a single moment of poor judgment—or simple ignorance—you trigger a prohibited transaction. Overnight, your tax-advantaged retirement account ceases to exist. The IRS treats your entire balance as distributed. You owe income tax on the full amount plus a 10% early withdrawal penalty if you’re under 59½.

This isn’t a hypothetical horror story. It happens more often than you think—especially as investors chase alternative assets like real estate, private equity, or cryptocurrency within their IRAs.

What Exactly Is a “Prohibited Transaction”?

According to IRS Publication 590-A, a prohibited transaction is any improper use of your IRA by you, your beneficiary, or a “disqualified person.”

Who counts as a disqualified person? The list is broader than most realize:

• You (the IRA owner)
• Your spouse
• Your ancestors (parents, grandparents)
• Your lineal descendants (children, grandchildren)
• Spouses of your descendants
• Your fiduciary (anyone with discretionary control over your IRA assets)

7 Common Prohibited Transactions (That Seem Innocent)

1. Borrowing from your IRA
   Taking a “short-term loan” from your IRA—even with intent to repay—is an instant prohibited transaction.
2. Buying investment property and using it personally
   Purchasing a vacation home with IRA funds and staying there for even one night violates the rules. Same for renting to a disqualified person below fair market value.
3. Selling property you own to your IRA
   Can’t unload that struggling rental property to your IRA to “simplify things.”
4. Using your IRA as loan collateral
   Pledging IRA assets to secure a personal or business loan triggers immediate disqualification.
5. Paying yourself for IRA-related work
   Managing an IRA-owned rental property and collecting management fees = prohibited transaction.
6. Conducting business with disqualified persons
   Your IRA buys a stake in your son’s startup? Prohibited. Your IRA lends money to your spouse’s business? Prohibited.
7. Storing IRA-owned assets at your home
   Holding physical gold coins or other tangible assets purchased by your IRA in your personal safe? That’s a prohibited transaction.

⚠️ Critical Warning from IRS Guidance: “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.”

The Nuclear Consequence: Loss of IRA Status

This is where most people underestimate the danger. When a prohibited transaction occurs:

✅ Your IRA immediately loses its tax-advantaged status—as of January 1 of the year the violation occurred
✅ The entire account balance is treated as distributed at fair market value
✅ You owe ordinary income tax on the full amount (not just gains)
✅ You likely face the 10% early withdrawal penalty if under 59½
✅ No opportunity to “fix it”—the damage is permanent for that tax year

Unlike excess contribution errors (which can be corrected), prohibited transactions cannot be undone. The tax bill arrives with your next return—and it’s often catastrophic.

Two Narrow Exceptions (Don’t Get Excited)

The IRS recognizes two limited scenarios that aren’t prohibited transactions:

1. De minimis payments from trustees
   Receiving promotional items from your IRA custodian valued at ≤$10 (for deposits <$5,000) or ≤$20 (for deposits ≥$5,000).
2. Bank services at reduced cost
   Receiving preferential banking services based on your IRA balance—if offered to non-IRA customers with equivalent balances.

These exceptions won’t help you with real estate deals, private investments, or creative financing arrangements.

How to Protect Yourself

1. Assume any transaction involving you or family members is prohibited until verified otherwise by a qualified tax professional
2. Never commingle IRA assets with personal assets—separate bank accounts, separate properties, separate businesses
3. Use a specialized self-directed IRA custodian if investing in alternatives—and understand they won’t police your transactions. Custodians facilitate; they don’t approve legality.
4. Get written guidance before executing non-traditional transactions—not after receiving an IRS notice
5. Document everything—especially arms-length transactions with third parties

The Bottom Line

Your IRA’s tax advantages exist within a carefully constructed legal framework. Step outside that framework—even accidentally—and the entire structure collapses.

Prohibited transactions aren’t just “mistakes with penalties.” They’re existential threats to your retirement account’s very existence. When in doubt: don’t do it. Consult a tax attorney specializing in retirement accounts before acting—not after the damage is done.

This article summarizes key points from IRS Publication 590-A (2025). Prohibited transaction rules are complex and fact-specific. Always consult a qualified tax professional before engaging in non-traditional IRA transactions.