How to Avoid Self-Directed IRA Prohibited Transactions

When people first hear about Self-Directed IRAs, their eyes light up. Real estate? Private loans? Precious metals? It feels like the doors swing wide open. And in many ways, they do. But there’s one part of the process that needs your full attention: prohibited transactions.

The IRS lays down these rules to keep the account fair and tax-advantaged. Break them, and the penalties can be steep. In fact, a single misstep can disqualify your IRA altogether. That’s why it’s worth slowing down and making sure you know where the lines are drawn.

What Counts as Prohibited with a Self-Directed IRA

The simplest way to think about it is this: the IRA is not you. Once money goes into the account, it has to be treated as separate. You can’t blur the lines. That means you can’t live in a property your IRA owns. You can’t rent it out to your kids. You can’t use IRA funds to buy a vacation home for yourself.

The same rule applies to expenses in the account. If your IRA owns a property, every dollar of maintenance, every tax bill, every repair check—it all comes from the account. You can’t cover costs from your personal bank account. The account has to stand alone.

Why These Rules Exist

We understand how you might feel about these rules. It can feel frustrating. But the IRS has a reason. The tax advantages of an IRA are powerful. Letting people use those advantages for personal benefit—like a free place to live—would defeat the purpose. The goal is simple: keep the account purely for retirement. That separation is what makes it possible for your investments to grow tax-deferred or tax-free.

It’s not just about homes, either. Prohibited transactions can show up in other areas like private lending or business ownership. Let’s say you want your IRA to invest in a company where your son is the CEO. That’s off limits, because it creates a direct benefit to what the IRS calls a “disqualified person.” The same goes for lending money from your IRA to a close relative. If it looks like self-dealing, chances are it is.

Another common trap is forgetting that improvements and upkeep belong to the IRA too. If you grab a paintbrush on the weekend and fix up the property yourself, that’s sweat equity—and it counts as a prohibited transaction. The IRA has to pay for labor, even if you feel like you’re saving money by doing it yourself. It’s small details like these that catch investors off guard, which is why working with experts pays off.

How to Stay on the Right Side

The good news? These rules are clear once you understand them. And you’re not expected to figure everything out on your own. Working with an experienced custodian can give you confidence that every transaction is handled properly. They’ll make sure money flows the right way and keep you away from the pitfalls that lead to penalties.

Avoiding prohibited transactions isn’t about playing defense. It’s about protecting your retirement’s future. You can think of that as playing offensive—getting more assertive with how you handle your IRA so that you never have to worry about making a mistake that can cost you a lot in fees and penalties. Ultimately, it’s good for your retirement. By respecting the rules, you get to enjoy the full benefits of self-direction without risking the account itself. That’s peace of mind you can’t put a price on. Want to talk it through with someone who knows the territory? Reach out to us here at New Vision Trust by dialing 866-7500-IRA today.