When an individual engages in a prohibited transaction with respect to their IRA, the IRA is disqualified and treated as distributed to the individual, regardless of the size of the prohibited transaction.

For transactions after December 29, 2022, SECURE 2.0 Act Section 322 clarifies that if an individual has multiple IRAs, only the IRA with respect to which the prohibited transaction occurred will be disqualified.

Generally, a prohibited transaction is any improper use of a traditional IRA account or annuity by the account owner, their beneficiary, or any disqualified person. Disqualified persons include the account owner’s fiduciary and members of the account owner’s family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

Examples of prohibited transactions with a traditional IRA include borrowing money from it, selling property to it, using it as security for a loan and buying property in the IRA for current or future personal use. When an IRA is invested in non-publicly traded assets or assets that the account owner directly controls, there’s increased risk of engaging in a prohibited transaction.