Prohibited Transactions: IRA Contributions and Transfers (2025 IRS Guide)

This guide covers “Prohibited Transactions” within ira contributions and transfers. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs), published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you don’t follow the rules. There are excise taxes and other negative tax consequences for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.

• Investing in collectibles.

• Making excess contributions.

• Taking early distributions. See Pub. 590-B.

• Allowing excess amounts to accumulate (failing to take required distributions). See Pub. 590-B.

• Having unrelated business income.

There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.

This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you don’t avoid those acts.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA.

• Borrowing money from it.

• Selling property to it.

• Using it as security for a loan.

• Buying property for personal use (present or future) with IRA funds.

.If your IRA is invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased..

Fiduciary.

For these purposes, a fiduciary includes anyone who does any of the following.

• Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets.

• Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so.

• Has any discretionary authority or discretionary responsibility in administering your IRA.

Effect on an IRA account.

Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

However, if you own more than one IRA, each IRA is treated as a separate account, and loss of IRA status only affects that IRA that participated in the prohibited transaction.

Effect on you or your beneficiary.

If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable? in Pub. 590-B. The distribution may be subject to additional taxes or penalties.

Borrowing on an annuity contract.

If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.

Pledging an account as security.

If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.

Trust account set up by an employer or an employee association.

Your account or annuity doesn’t lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a prohibited transaction.

Owner participation.

If you participate in the prohibited transaction with your employer or the association, your account is no longer treated as an IRA.

Taxes on prohibited transactions.

If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount involved in the prohibited transaction and a 100% additional tax if the transaction isn’t corrected.

Loss of IRA status.

If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary isn’t liable for these excise taxes. However, you or your beneficiary may have to pay other taxes, as discussed under Effect on you or your beneficiary, earlier.

Exempt Transactions

The Department of Labor (DOL) has authority to grant administrative exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code for a class of transactions or for individual transactions. In order to grant an administrative exemption, the DOL must make the following three determinations.

1. The exemption must be administratively feasible.

2. In the interest of the plan and its participants.

3. Protective of the rights of plan participants and beneficiaries.

For additional information on prohibited transaction exemptions, see the Exemptions page on the Department of Labor website. For information on filing and the processing of prohibited transactions exemption applications, see Procedures Governing the Filing and Processing of Prohibited Transaction Exemption Applications.

The following two types of transactions aren’t prohibited transactions if they meet the requirements that follow.

• Payments of cash, property, or other consideration by the trustee of your traditional IRA to you (or members of your family).

• Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained.

Payments of cash, property, or other consideration.

Even if a trustee makes payments to you or your family, there is no prohibited transaction if all three of the following requirements are met.

1. The payments are for establishing a traditional IRA or for making additional contributions to it.

2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries.

3. During the year, the total fair market value of the payments you receive isn’t more than:

   1. $10 for IRA deposits of less than $5,000, or

   2. $20 for IRA deposits of $5,000 or more.

If the consideration is group-term life insurance, requirements (1) and (3) don’t apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA.

Services received at reduced or no cost.

Even if a trustee provides services at reduced or no cost, there is no prohibited transaction if all of the following requirements are met.

• The traditional IRA qualifying you to receive the services is established and maintained for the benefit of you, your spouse, and your or your spouse's beneficiaries.

• The bank itself can legally offer the services.

• The services are provided in the ordinary course of business by the bank (or a bank affiliate) to customers who qualify but don’t maintain an IRA (or a Keogh plan).

• The determination, for a traditional IRA, of who qualifies for these services is based on an IRA (or a Keogh plan) deposit balance equal to the lowest qualifying balance for any other type of account.

• The rate of return on a traditional IRA investment that qualifies isn’t less than the return on an identical investment that could have been made at the same time at the same branch of the bank by a customer who isn’t eligible for (or doesn’t receive) these services.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs): Traditional IRAs — What Acts Result in Penalties or Additional Taxes? — Prohibited Transactions — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.