Distribution from Traditional IRA - Clarification of Prohibited Transactions

Can someone clarify the fourth example “prohibited transaction” in IRS Publication 590-B, “buying property for personal use (present or future) with IRA funds”?

If someone (59-1/2 or older) withdraws funds from a traditional IRA and uses it to buy real estate upon which they intend to use as a primary residence, is that what the prohibited transaction is referring to?

I’ve heard one interpretation that the IRS means you cannot put property “into your IRA”, but that seems to be the 2nd of 4 examples in the publication, i.e. “selling property to [the IRA]”.

IRS Pub 590B

An excerpt follows:

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.

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

Hi @StevenKilbey,

These reference transactions INSIDE of the IRA.

  1. You can’t borrow from it then replace the cash.
  2. You can’t put your house up for sale then have your IRA buy it.
  3. Self explanatory.
  4. You can’t buy something inside of your IRA, then use it as a personal item like buying a car or a house, then you drive the car or live in the house.

It also gets sticky when a business is purchased because it limits how much involvement you can have in that business.

But understand, the above is all dealing with the money INSIDE of the IRA.

Once funds are withdrawn from the IRA, you can use them for most any legal use. The house I am living in right now was built using money from our Roth IRA’s.

Does that help you?

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No. After the funds are withdrawn from the IRA (with appropriate taxes to be paid), the funds are no longer subject to the prohibited transactions clause, because they are no longer in the IRA.

Examples of when the prohibited transactions issue occurs are when the IRA itself owns something (like property) that the owner of the IRA is using for their personal use or the owner of the IRA is paying for expenses for something that the IRA owns from non-IRA funds.

Yes, that’s the 2nd example that you cited. However, it also means that you can only make original contributions into an IRA using cash. You cannot, for example, take stock that you own in a taxable account and contribute it to an IRA. You would have to sell the stock (recognizing any gains or losses), make the IRA contribution using cash generated from the sale, and then buy the stock in your IRA using the money you contributed. (Note: this does not prohibit in-kind rollovers or conversions of stock - just original contributions.)