Disqualified Persons

Disqualified Persons are bad news for your self directed I.R.A.

Under no circumstances can your IRA engage in any type of transactions with disqualified persons.

Your IRA can’t even do anything that brings an indirect benefit to a disqualified person.

Unfortunately, this deadly designation includes all of the people [and most of the entities] most important to you…

So who are these dastardly disqualified persons?  Read on…

Broadly speaking, “disqualified persons” for purposes of your self-directed (or any) IRA include:

  • You – the owner of the IRA
  • Family – your ancestors, descendants and their spouses
  • IRA Account Professionals – your account custodian or anyone providing services connected to the IRA
  • Related Entities – any business or organization on which you or a family member have substantive ownership or influence

“Disqualified Persons” is a critically important consideration. By engaging in a transaction that directly (or even indirectly) benefits a disqualified person, your entire IRA will be categorized as “Fully Distributed”, which is catastrophic to your IRA and nearly always irreparable.

The IRS provides more guidance about Disqualified Persons here.

Alas, there’s more… FAR MORE… than meets the eye, and it’s all legally uncharted waters.

In moving forward, keep this little tidbit in mind: The IRS lists 10 groups of people who are DISQUALIFIED from doing business with your IRA. What’s #1? That honor goes to anyone who can be described as a FIDUCIARY of the plan. And SDI Society Legal Counsel Tim Berry – the Great One, we call him – tells us that Section 4975 of the tax code defines Fiduciary as anyone who has discretionary authority over a retirement plan.

Do YOU have discretionary authority over your retirement plan? Yes, you do. Remember, it’s *SELF* directed.

But that only prohibits the IRA from doing business directly with you, right? You’d think so, but… no.

According to Tim, the examples in that regulation (26 CFR 54.4975-6 a(5)) make it arguable that the disqualification extends not just to the fiduciary, but to anyone in whom the fiduciary has an “interest” that could sway the judgment of the fiduciary. Notice the use of the vague word “interest”. It doesn’t say bloodline. It doesn’t say family relationship. It doesn’t even say “personal relationship”. It just says “interest”.

Is it arguable that you have an interest in your siblings, your aunts, your uncles, your nieces or nephews? Sure it is.

So the bad news is this: The law says YOU are a fiduciary of your plan, and that you – and anyone in whom you’ve got an interest – are disqualified from doing business with your IRA. That’s a sobering thought.

The good news: Tim says he’s never seen this authority asserted by the IRS, so maybe their operating definition is narrower than what appears to be stipulated in law. Our advice: always, always, always consult qualified legal counsel before engaging in any transaction in your self directed ira. Our recommendation is to contact Tim Berry.

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About The Author

Bryan Ellis

I am host of Self Directed Investor Talk, which I'm told is America's #1 podcast and for affluent self-directed investors. I'm also something of an expert in self-directed IRA's, solo 401k's and 1031 exchanges. You can find more of my writing in some cool places like TheStreet.com, Entrepreneur.com, ThinkRealty and even Forbes (that was always one of my goals!). I live in metro Atlanta, Georgia with my wife and business partner Carole Ellis(she's a real business partner... not just because she's my wife... I'd want to work with her if I wasn't married to her... and I'd want to marry her, too). I also have 4 children ranging in age from 2 to 20 (yes, you read that correctly). It's my goal to be the name everybody thinks of when they think of Self-Directed IRA's and Solo 401(k)'s.