by Kristin P. Sinclair – A Accu Tax – January 15, 2018
Just as there are definite tax advantages for using a Traditional IRA, there are also penalties if the rules are not followed. Not only are additions to the regular tax for using your IRA funds to engage in prohibited transactions, there may also be additional taxes for the following activities:
- • Investing collectibles
- • Making excess contributions
- • Taking early distributions
- • Allowing excess amount to accumulate
A prohibited transaction is generally any improper use of your Traditional IRA account or annuity by you, your beneficiary, or any disqualified person(disqualified persons include your fiduciary and members of your family. Hyour family includes spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.)
Examples of prohibited transactions with a Traditional IRA are:
- • Borrowing money from your IRA
- • Selling property to your IRA
- • Using your IRA as security for a loan
- • Buying property for personal use (present or future) with your
- • Traditional IRA funds.
It is also important to note that if your IRA invested in non-publicly traded assets, or assets that you directly control, the risk you face for engaging in prohibited transactions may be increased.
If you or your beneficiary engage in a prohibited transaction with your IRA, then the most common consequence is that your IRA ceases to be an IRA as of the first day of that year. This means that your IRA account is treated as distributing all of its assets to you at their fair market values on the first day of the year. If the total of those values is greater than your basis in the IRA, you will have a taxable gain that normally must be included in your income.
For additional information on prohibited transactions and questions concerning how you might want to utilize your retirement funds, call Kristin Sinclair with A Accu Tax at (803)329-0615.
Updated in Charleston SC and Rock Hill SC
January 15, 2018 (803)329-0609
KPS: More information is available at IRS.gov.
See Publication 590-A and Publication 590-B.