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Schulfer & Associates, LLC

Don’t Blow Up Your IRA

Every now and again, I receive calls asking curious questions about what a person may be able to do with their IRA (Individual Retirement Arrangement).  Often, they’ve heard an angle from a friend, a pitch from someone trying to sell them something, may have misunderstood a strategy or are being just completely creative in their thinking.  I have cautioned many a questioner about a term they usually have never heard of:  a “Prohibited Transaction” in an IRA or retirement plan. 

According to, “Generally, a prohibited transaction in an IRA is any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person.  Disqualified persons include the IRA owner’s fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).” (1)  Examples of possible prohibited transactions with an IRA include borrowing money from it, selling property to the IRA, using it as security for a loan, or buying property for personal use (present or future) while money is still in the IRA.

So, what happens if you engage in a prohibited transaction, even unintentional, in your IRA?  The account stops being an IRA as of the first day of the year in which the transaction occurred.  The IRA is treated as distributing all of it’s assets to the IRA owner at fair market value on January 1 of the year in which the prohibited transaction occurred.   Taxes and premature distribution penalties (if under 59 ½) will apply.  Depending upon your tax bracket, which may increase with the distribution of the IRA (as it is included in your ordinary income), the taxes and penalties can be upwards of 50% of the balance of your IRA!

Specifically, the three most common questions that I hear related to the above are, Can I borrow money from my IRA?  Answer:  No.  Can I use my IRA as collateral for a loan?  Answer:  No.  Can I purchase real estate in my IRA?  Answer:  Maybe.

I often receive questions about investing in various types of real estate.  It’s a broad asset class that can be a used as a diversifier in your portfolio.  You may own many types of REITs (Real Estate Investment Trust) in your IRA, either traded or non-traded.  However, if the real estate is in another entity such as a Private Placement or an LLC, it may be subject to UBTI (Unrelated Business Tax Income) which can become very complex and problematic.  I would recommend you contact a qualified professional such as your tax advisor before making such an investment with your IRA.  Conversely, if such an investment is attractive to you, consider this allocation with your non-retirement funds instead.

Self-Directed IRA’s may legally purchase Real Estate directly, but I highly recommend you know your risks.  Consequently, this is not something I would ever recommend or assist a client with.  There are custodians who will assist you in purchasing investment property, but be aware of the words in the title, “Self-Directed”.  This means that YOU are ultimately responsible for the transactions in the IRA.  In fact, in September of 2011, the SEC issued an investor alert warning of the risks involving self-directed IRA’s, cautioning that custodians for self-directed IRA’s have limited duties to account holders and that investors should be mindful of potential fraudulent schemes.  Read the entire alert at .

Directly purchasing Real Estate in your IRA includes disadvantages and risks which an investor may not have considered.  Among others, these may include subjecting your IRA to liability exposure that comes with owning investment property, or forgetting that neither you nor your family members may personally use the property. There are limits to contributions made to IRAs.  This can become a problem if you need to do repairs or improve the property, as you may not add dollars to the IRA beyond annual contribution limits.  IRA’s are subject to distribution rules upon death which could be difficult particularly for a non-spouse beneficiary, if real estate is owned in the IRA, as it is illiquid.  You may forego tax benefits that you would have otherwise enjoyed had you purchased the investment property with non-retirement dollars, because in an IRA you do not receive deductions, depreciation or long term capital gains rates. These are just a few examples. 

The word “RISK” is most associated with the potential for market losses in an investment. Often people forget there are many other risks to be concerned with, like the risk of “you don’t know what you don’t know”, and that could blow up your IRA.


(Author’s note:  Due to industry regulations, I am prohibited from responding to any online comments. I welcome you to contact me via e-mail:


LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.