Prohibited transactions and disqualified persons are topics that every self-directed investor needs to be thoroughly familiar with
The terms are ominous enough - prohibited transactions and disqualified persons. To self-directed investors, they are two things that must be avoided.
The Internal Revenue Code is exclusive in nature in that it doesn't tell investors what they can invest, but only what they can't. For every IRA, there are people and entities that are disqualified from transacting with the retirement plan. IRS rules do not allow the IRA to deal with these people and entities.
These prohibited parties are referred to as disqualified persons and they include the IRA owner and their spouse, lineal ascendants and descendants, and certain fiduciaries.
A transaction between an IRA and a disqualified person results in a prohibited transaction.
Disqualified persons can't benefit from dealing with the plan, they can't buy or sell assets from the plan or make personally use an asset. They also can't rent or reside in IRA-owned real estate and "sweat equity" is a no-no as well because you'd be providing personal benefits to the asset.
So transactions such as selling or leasing assets, loaning money, furnishing goods, services or facilities relating to the retirement plan's assets are considered prohibited by the IRS. Further, retirement plans and entities owned or controlled by disqualified persons are not allowed to deal with an IRA.
Generally, the IRS treats IRA assets involved in a prohibited transaction as though they were distributed on the first day of the year in which the transaction occurred. What typically happens is the assets are added to the income of the IRA owner, and if you're under 59 and 1/2 years old, early distribution rules will apply.
The relevant provisions are found in IRC § 4975 and if you want more details you should consult legal counsel. But if you want a quick reference, the Prohibited Transactions and Disqualified Persons infographic from IRAYourWay.com can help.
With a quick glance, you can check your family tree or company structure and determine whether or not your transaction will pass muster as far as the IRS is concerned.
If you have any questions or concerns about prohibited transactions and self-directed IRA's, call us at (606) 887-9271 and we'll help you get answers and get started saving for your dream retirement.