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February 23, 2024

Prohibited Transactions for Retirement Plans

Prohibited Transactions for Retirement Plans

Prohibited transactions can lead to huge tax issues for the unaware investor. Prohibited transactions occur when an investor uses retirement funds from a 401(k) or IRA in a manner that that IRS does not allow.

Prohibited transactions generally include the following transactions:

  1. A disqualified person’s transfer of plan income or assets to, or use of them by or for his or her benefit
  2. A fiduciary’s act by which he or she deals with plan income or assets in his or her own interest
  3. A fiduciary’s receipt of consideration for his or her own account in a transaction that involves plan income or assets from any party dealing with the plan
  4. Any of the following acts between the plan and a disqualified person:
    1. Selling, exchanging, or leasing property
    2. Lending money or extending credit
    3. Furnishing goods, services or facilities

Tax on Prohibited Transactions
The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the tax period. If the transaction isn’t corrected within the tax period, an additional tax of 100% of the amount involved is imposed.
Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.
Amount involved
The amount involved in a prohibited transaction is the greater of the following amounts.

  • The money and fair market value of any property given.
  • The money and fair market value of any property received.

If services are performed, the amount involved is any excess compensation given or received.

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