One Simple Way To Avoid Prohibited Transactions [EPISODE #264]

by | May 16, 2017

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One Simple Way To Avoid Prohibited Transactions [EPISODE #264]

by | May 16, 2017

The Big Idea

There's one simple operating principle that is more powerful than any other for avoiding prohibited transactions in your self-directed IRA, and that's simplicity...

Points To Ponder

  • You're welcomed to join us for a casual dinner in the Bay Area of San Francisco on June 12 or 13, 2017.  Email us at if you're interested
  • The biggest factor to avoid prohibited transactions:  Simplicity
  • Prohibited Transaction:  any transaction involving your IRA that benefits you rather than just the IRA
  • Assets that are standardized are safest regarding prohibited transactions. Examples:  Stocks, CD's, mutual funds
  • The more complex, the greater the prohibited transaction risk.
  • Progression:  Real estate, rental properties, real estate flipping (lease complex and risky to most complex and risky)
  • Excellent alternative:  Private Lending


  • Episode #264 (this episode) of Self-Directed Investor Talk is available here
  • Send email to if you'd like to join us for a casual meet-and-greet in San Francisco on the evening of June 12 or June 13
Full Transcript

There’s one CORE CONCEPT that will do more than any other to help you avoid the FINANCIALLY FATALITY that you can experience if you commit a dreaded prohibited transaction in your self-directed IRA.  I’m Bryan Ellis.  I’ll tell you what that concept is RIGHT NOW in Episode #264.


Hello, Self Directed Investor Nation!  Welcome to the broadcast of record for savvy self-directed investors like you!  This is Episode #264, so that means all of the notes and resources for today’s show will be available to you at

Hey – for all of you folks in the Bay Area of San Francisco – I’ll be in your area soon, and I’d love to meet you!  In fact, I and my lovely wife Carole will be in the area on the evenings of June 12 and June 13… and I’d love to meet you!  Let me know if you’d like to join us… some of us will likely just have dinner together one of those evenings.  If you’d like to join us, drop me a line at ,

Now why will I be visiting the Bay Area?  And more importantly, what’s the answer to today’s focal point, which is:  What one concept is the best driving force for avoiding trouble with prohibited transactions in your self-directed IRA?

The answer are related, it turns out.

You see, I’ll be in the Bay Area during that time because I’ve been asked to come out and teach concepts of estate and tax planning in connection with Self-Directed IRA’s to licensed California attorneys.  There’s a huge amount of interest in the topic of self-directed IRA’s in the legal community, and it’s a high honor for which I’m grateful to have been asked to teach continuing education to California attorneys through UCLA’s continuing education program for lawyers.

As I’ve been preparing for this training I’ll be doing for lawyers, there’s one concept that comes up over and over and over again as the best defense against the risk of prohibited transactions in a self-directed IRA.

That concept is simplicity.

Now for those of you just getting started in the self-directed IRA or 401k world, let me take a quick moment to catch you up on this thing called “prohibited transactions”.  Without being particularly technical, think of a prohibited transaction as anything you could potentially do to use the assets of your IRA in a way that doesn’t wholly benefit your IRA alone.

Some simple examples:  If you borrow money from an IRA, that’s a benefit to you, and it’s prohibited.  If you own real estate in your IRA, and you either live in or even just occasionally use that real estate yourself, that’s a benefit to you, and it’s prohibited.  If you use your IRA funds to renovate property that’s owned by you, and not your IRA, that’s a benefit to you, and it’s prohibited.

And the significance is that for most prohibited transactions, you’re blowing up your IRA if you commit one.  It’s quite common – probably even the norm – for people who square off with the IRS over prohibited transactions to lose ½ or more of their entire IRA balance.  And it’s in no way rare for people to lose the entire thing.  So this is a huge, massive, big, big, big deal to avoid prohibited transactions.

Which returns me to the issue of simplicity.

Here’s a good generalization:  The more complicated or non-standard a transaction is, the more likely it is to result in a prohibited transaction.

So, what’s the simplest investment you can make in an IRA?  Probably just buying a publicly traded stock, right?

Sure, that’s simple.  And there’s very little risk of committing a prohibited transaction when limiting yourself to the most common and standardized of assets, including stocks, bonds, mutual funds, CD’s, etc.  In other words… all of the stuff that either Wall Street or your bank will sell to you.

Then there’s real estate, which is easily the most common type of asset in self-directed IRA’s.  If you simply buy real estate and hold onto it, that’s relatively straight forward.  You’ve got to avoid using that real estate in a personal context, but other than that, it’s generally pretty simple to avoid prohibited transactions, although slightly more complicated than with stocks or CD’s.

Then there’s rental property.  There again, it’s a relatively common type of transaction in a self-directed IRA, but there are more moving parts than a simple buy-and-hold of a piece of real estate.  Just the question of managing and renovating a property complicates the issue a bit more, and there are more ways that you can commit – quite accidentally, no doubt – a prohibited transaction.

Then there’s property flipping, which is possible but represents its own can of worms for self-directed IRA’s.  It’s even more complicated and more prone to prohibited danger than rental property investments.

You see my point?  There’s a progression… and the simpler the asset is, the more likely it is that you won’t commit a prohibited transaction.

But that does not mean you should shy away from these alternative assets.  No way.

In fact, I think that one particular type of real estate-related asset stands out as a spectacular intersection of alternative asset investing and safety concerning prohibited transactions, and that is private lending.

If your IRA acts as a private lender, essentially what you’re doing is making profit for your IRA in the form of interest.  And frankly, the law concerning lending and notes and debt is very well settled, leaving very little room for prohibited transaction issues.  Not zero room, but very little.  I think this is absolutely the best way for most people to get some real estate exposure in their IRA.

So what’s the point?

Well I’m glad you asked!  The point is to always evaluate your transactions on a relative complexity scale as an initial indicator for determining how high your prohibited transaction risk actually will be.

Want a great test for complexity?  Visit a local bar in a professional area of town, and strike up a conversation with some other patron.  Tell them what you’re about to do, and see what reaction you get.  For example:  “I’m about to buy a rental property in my IRA… have you ever done that before?”

And then, just listen.  If they mostly pepper you with questions, there’s some complexity there.  And that’s a great sign to make sure you have high-quality legal counsel on board BEFORE you take any action…

Because my friends, the cost of prohibited transactions can be exceedingly high… but it’s a risk that’s highly avoidable.  And that’s what I want for you:  To enjoy all of the flexibility of your Self-Directed retirement account… while steering clear of the potentially fatal landmines.

And remember – if you’re in the Bay Area and would like to meet up for a casual group dinner on June 12 or June 13, I’ll be in the area teaching California lawyers about self-directed IRA’s during the day, but would be delighted to meet you folks in the evening.  Just drop me a note to and I’ll let you know where we’ll be.

My friends… invest wisely today, and live well forever!

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Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.