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Prohibited Transactions and Disqualified Persons

prohibited by Phillip McI have covered the topic of Prohibited Transactions in an earlier article – one of the main prohibitions is that you can’t self-deal with your IRA by borrowing from, selling to, or allowing a class of persons, called Disqualified Persons, to transact business with your IRA as well.

The problem that often comes up, especially with IRAs that invest in “self-directed” activities like Real Estate, is that folks look at the list of Disqualified Persons and determine that there are other persons that they can allow to make transactions with their IRA – and that since these others are not Disqualified, the transaction will no longer be a prohibited transaction.

Let’s back up and define Disqualified Persons – this means you, as the account owner, your spouse, your parents, grandparents or other ancestors, as well as your children, grandchildren, or other descendants, as well as the spouses of any of these persons. So, for example, your step-child wouldn’t be a Disqualified Person, as long as you haven’t legally adopted the child. In addition, your siblings aren’t Disqualified Persons either, nor would your girlfriend or boyfriend be disqualified. So technically, one of these people could transact business with your IRA – as long as there is no other reason to prohibit the transaction.

The problem is, if you (or another Disqualified Person) benefit directly or indirectly from a transaction with the IRA, the transaction is prohibited – no matter who the person is that you’ve transacted with. So, for example, if you’ve invested in a condo with your IRA money, and you rent the condo out to non-related persons, you’re in good shape. But if you try to play it cute and rent the condo out to your boyfriend, and you send your children to vacation with him for three weeks in the summer, the rental transaction is prohibited since disqualified persons have benefited from it.

In this case, it’s possible that the transaction could result in a penalty, or possibly invalidating your IRA, prompting an immediate disqualification and distribution including taxes and penalties, which could be a very bad thing.

5 Comments

  1. […] know from previous articles that it’s not allowable to transact business with disqualified persons.  Therefore, you can not take a loan from your IRA to finance your business.  But what if you […]

  2. […] written in the past about the types of transactions that are prohibited in your IRA, and how these transactions are generally quite onerous if you happen to use one of them.  In fact […]

  3. […] mentioned before about various types of transactions that are not allowed in your IRA, but we’ve not actually covered the topic of Unrelated Business Taxable Income (UBTI) in your […]

  4. IRA Cross Loans – Don’t Even Think About It - Finance | Business News Online says:

    […] know from previous articles that it’s not allowable to transact business with disqualified persons.  Therefore, you can not take a loan from your IRA to finance your business.  But what if you […]

  5. Prohibited Transactions and Disqualified Persons - Finance | Business News Online says:

    […] IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).Prohibited Transactions and Disqualified Persons […]

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