Do you know what a Prohibited Transaction is? Its an impermissible transaction under the Internal Revenue Code that happens between an IRA and a disqualified person. A disqualified person could be an IRA owner, spouse, or owners lineal descendants. Some examples of IRA prohibited transactions are borrowing money from or lending money to your IRA, using your IRA as collateral for a loan, the sale, exchange or leasing of property involving your IRA.
Its ruled under the IRS that your entire IRA will lose its status as an IRA, if engaged with a prohibited transaction. This happens your tax-deferred IRA will then be treated as if assets were distributed to you on the first day of the year the prohibited transaction occurred. Income tax will be due on the distributed amount and if under fifty-nine you will also be subject to a 10% early distribution penalty.
Many people face the common problem of making prohibited transactions, here’s a quick tip that could help.
Tip: If you’re not certain the transaction you want to make is IRA prohibited, consider splitting your IRA prior to transaction. The idea is to cut out the amount you want to use from your original IRA, making a separate IRA only for the questionable transaction. By doing this you won’t destroy your entire IRA if the transaction was prohibited and only impact the IRA with the prohibited transaction.
Source: America’s Tax Solutions Photo: Pexels
Rhonda A. Mannes,