Prohibited Transaction Forfeits IRA Protection

Florida Statute 222.21 protects from creditors financial assets that qualify under specified sections of the Internal Revenue Code to include most IRAs, 401k plans, and other common tax “qualified” retirement plans. The Internal Revenue Code states that a IRA will cease to be tax qualified for tax purposes the first day of the tax year in which the taxpayer and the IRA are involved in what is called a “prohibited transaction.” Examples of prohibited transactions include sales, exchanges, and similar financial transactions between the IRA and its owner or other “disqualified persons” such as members of the owner’s family.

For asset protection, it is important to keep in mind that any prohibited transaction or self-dealing which would cause an IRA to lose its tax qualification not only would have adverse income tax consequences, but it would also cause the IRA to forfeit its creditor protection. The loss of creditor protection would be retroactive to the beginning of the tax year which causes the problem to be even more troublesome for asset protection planning.

Last updated on May 22, 2020

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