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Retirement Topics - Tax on Prohibited Transactions

A disqualified person must pay an initial tax on a prohibited transaction of 15% of the amount involved for each year (or part of a year) in the taxable period. If the disqualified person does not correct the transaction within the taxable period, there is an additional tax of 100% of the amount involved.

Both taxes are payable by any disqualified person who participated in the transaction.

Amount involved. The amount involved in a prohibited transaction is the greater of:

  • The money and fair market value of any property given
  • The money and fair market value of any property received

If services are performed, the amount involved is any excess compensation given or received.

Taxable period. The taxable period starts on the transaction date and ends on the earliest of the following days.

  • The day the IRS mails a notice of deficiency for the tax.
  • The day the IRS assesses the tax.
  • The day the correction of the transaction is completed.

Payment of the 15% tax. Pay the 15% tax with Form 5330.

Correcting a prohibited transaction. A disqualified person who participated in a prohibited transaction can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

Additional resources:

Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
Internal Revenue Manual - Prohibited Transactions