IRS Rules Part 1: Dealings with Disqualified Persons (Don’t Do It)

Investors who follow IRA rules set and enforced by the IRS have one thing in common: They rarely get in trouble with the IRS regarding their retirement accounts. One rule that’s important for self-directed IRA owners is to avoid dealings with disqualified persons.

Why?

Because compliance with the IRS keeps all retirement accounts, including self-directed IRAs, in good standing. Failing to do so can cause heavy penalties, taxation, and even disqualification of IRAs. And, no one wants that. Those who follow the rules have nothing to fear.

Two Important IRS Rules that IRAs Must Follow

  1. Avoid dealings with disqualified persons.
  2. Do not participate in prohibited transactions.

Each rule has significant bearing on the other–because if you commit a prohibited transaction with or without a disqualified person, you’re looking for trouble from the IRS.

If you use a self-directed retirement and/or savings plan, you must personally understand these two IRA rules to successfully maintain your retirement account. IRC 4975 encompasses various and specific prohibited transactions applicable to all retirement plans (self-directed or not) that must be avoided when investing with retirement funds.

These rules can be complex in some areas. So, we are going to break them down for you in a series of two articles. This article explains the first of the IRA rules listed above.

Your IRA May Not Conduct Business with Disqualified Persons

The IRA owner must ensure the plan does not perform transactions with the following persons or entities. These people are deemed disqualified persons by the IRS and as such are prohibited from doing business with your plan.

  • The IRA holder (you)
  • The IRA holder’s spouse
  • The IRA holder’s lineal descendants and their spouses (children, grandchildren etc.)
  • The IRA holder’s lineal ascendants (parent, grandparent etc.)
  • Investment advisors and managers
  • Those providing services to the IRA
  • Any corporation, trust, partnership, or estate where the disqualified person has 50 percent or more interest

Examples of Prohibited Transactions with Disqualified Persons

This means your IRA can’t purchase an investment from your mom. You can’t sell property you already own to your IRA. And your IRA can’t extend private mortgages to your kids or anyone else on this list. These are a few examples prohibited transactions, which are covered in detail in part two of our IRA rules articles (coming soon).

For now, concentrate on familiarizing yourself with disqualified persons in your life that are prohibited from dealing with your IRA. Know exactly who these people and/or entities are minimalizes mistakes you might make in your self-directed IRA.

Questions? Contact Advanta IRA Today

If you have any questions about IRA rules or disqualified persons, please contact Advanta IRA for a free consultation. We don’t give investing advice or sell investments, but we can explain how dealings with disqualified persons work and why dealings with these people or entities are considered prohibited transactions in your IRA.

Additional reading on IRA rules:

Partnering Funds with a Disqualified Person

Partnering IRA Funds with Another IRA to Invest

This article was first published on September 18, 2017 and has been updated with current information.

 

 

 

About Scott Maurer

Scott is an attorney and a graduate of the University of Florida Law School. Scott started his career with Advanta IRA in 2006. His experience with various investment types and their unique processes makes him an invaluable asset. Scott holds the designation of Certified IRA Services Professional (CISP) and leads engaging seminars and webinars that educate the public on the intricacies of self-directed IRAs.