Many people are reluctant to explore alternative investing with their retirement funds (or are advised not to do so) mainly because of their fear of making a prohibited transaction. This fear keeps many people from taking full advantage of their retirement funds to build wealth. (And, more pertinent in today’s economy, it prevents them from establishing healthy diversification beyond the public markets into private notes, real estate, tax liens, and other assets that are typically uncorrelated with the stock market.)
Jeff Nabers, founding member of the IRA Association of America, has invested a great deal of time into developing simple explanations of the tax code that designates exactly what is prohibited. (He does it as part of the mission of the IRAAA — to help people understand all their options for optimally investing their retirement money to meet their goals.)
On his blog, Jeff kicked off an informative Q&A about the topic with his article, “Prohibited Transaction Basics.” It’s worth following this discussion if you’ve been thinking about diversifying but fearful of a tax misstep.