For many people in or nearing retirement, IRAs are a cornerstone of their financial plan. But even a small misstep can create big problems. One of the most common — and most expensive — mistakes IRA owners make is engaging in a prohibited transaction.

A prohibited transaction happens any time IRA money is used for personal benefit instead of for the IRA itself. It may seem harmless at first, but the IRS takes these rules very seriously. Misusing IRA funds can lead to steep taxes and penalties, putting your retirement savings at risk.

The good news? With the right knowledge and guidance, you can steer clear of these mistakes and keep your savings on track.

What Is a Prohibited Transaction?

In simple terms, it’s when IRA assets are used in a way that benefits you personally. A few examples include:

• Using IRA money to invest in a business you personally run
• Mixing your personal money with IRA money
• Borrowing from or lending money to your own IRA
• Using IRA assets as collateral for a loan
• Falling for promotions that claim the IRS “approved” a special IRA strategy (spoiler: the IRS doesn’t pre-approve investments)

Everyday Examples of Prohibited Transactions

• The Vacation Home Trap: Imagine your IRA owns a rental property. It might be tempting to stay there for a week or let your kids use it — even if you plan to “pay rent.” Unfortunately, that’s considered personal use, which is prohibited.
• The Family Loan Misstep: It’s natural to want to help children or grandchildren with things like a loan for college or a first car. But if that money comes from your IRA, even with good intentions, it’s considered a prohibited transaction.
• The Business Boost: Suppose you use IRA funds to invest in your own small business or one run by a close family member. Even if it helps the business grow, the IRS considers this self-dealing — and it can disqualify the entire IRA.

These situations might feel harmless, but the IRS sees them as you personally benefiting from your IRA — which can trigger serious tax consequences.

5 Steps to Help Protect Your IRA

To make things easier, Ed Slott & Company — America’s IRA experts — created a guide called “Protecting an IRA from Prohibited Transactions in 5 Easy Steps.” Here’s a snapshot:

1. Ask who benefits. The transaction must benefit the IRA, not you personally.
2. Keep accounts separate. Don’t mix personal and IRA assets — ever.
3. Avoid deals with your IRA. No borrowing, lending, or using IRA money as collateral.
4. Watch out for scams. If someone says the IRS “approved” an investment, it’s a red flag.
5. Be wary of workarounds. Complicated structures designed to “get around” the rules usually don’t.

Why This Matters for Your Retirement

When you’re retired — or planning to retire soon — every dollar matters. A prohibited transaction could undo years of careful saving, which is why knowing the rules is so important.

At Richmond Brothers, our purpose is to help you live fearlessly into and beyond retirement. That means not only growing your wealth but also protecting it from avoidable mistakes. Prohibited transactions are one of those hidden risks that can sneak up on even the most careful savers — especially if you own a self-directed IRA or explore alternative investments.

The good news is you don’t have to figure it out on your own. Our advisors are members of Ed Slott’s Master Elite IRA Advisor Group, a network of professionals trained to spot these pitfalls and provide the most up-to-date IRA guidance.

Download Your Free Guide

We’ve partnered with Ed Slott & Company, LLC to share their resource:
📄 Download “Protecting an IRA from Prohibited Transactions in 5 Easy Steps” here

This quick, plain-English guide will help you understand the rules and protect your hard-earned savings.

Let’s Talk About Your Retirement Plan

Every family’s situation is unique. If you have questions about your IRA or would like a second opinion on your retirement plan, we’d love to help. Schedule a Clarity Conversation with us — a short, no-obligation visit to discuss your goals and see if your plan is built to weather today’s environment (and tomorrow’s).

📞 Call us at 517-435-4040 or email us at questions@richmondbrothers.com to set up a time.

At Richmond Brothers, we’re here to help you avoid costly mistakes and feel confident about your future.