Partnering Your IRA with a Disqualified Person

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In the self-directed IRA world, retirement investors often have many questions about disqualified persons when creating their ideal strategy for acquiring IRA assets. The IRS' disallowance of self-dealing between IRA owners and their accounts means investors who are considering purchasing real estate, investing in a company, making a loan, or buying hard assets like precious metals need to understand the people and entities that are disqualified to their IRA to avoid prohibited transactions and any consequential penalties.

There are several pages of the Internal Revenue Code (section 4975) dedicated to who and what are disqualified entities to IRA accounts. Despite the plethora of information provided by the IRS, prohibited transactions continue to be a gray area. To further complicate matters, partnering an IRA account with disqualified persons is actually allowed.

Disqualified Persons & Prohibited Transactions

To provide a quick summary, disqualified persons include one’s self, one’s spouse, lineal ascendants and descendants and those descendants’ spouses. The disqualified designation also extends to business entities owned and/or controlled by all disqualified persons, as well as some fiduciaries associated with these business entities.

Prohibited transactions between an IRA and a disqualified person/entity include buying from, selling to, paying compensation to, extending credit to, receiving a loan from, and allowing use of assets between one another.

Partnering with Disqualified Persons

Despite the many rules tied to disqualified persons and prohibited transactions, partnering with disqualified persons/entities is allowed by the IRS. To partner with a disqualified person, an IRA and it's partner(s) both acquire a specified percentage of a purchased asset. All income and payments related to that asset must be divided along the percentage lines established at the time of purchase. Depending on how much activity is associated with the investment, this process can be somewhat cumbersome. However, it's imperative to keep up with this arrangement or else face possible fines by the IRS.

A helpful way to think about whether or not a prospective transaction is prohibited is to picture a physical negotiating table on which the transaction will be made. Money will move across this table from one side to the other, and in exchange a benefit or asset will move from one side to the other. If the disqualified person/entity is on the same side of the table as your IRA, then the transaction is most likely legal. If the disqualified person is on the other side of the table from which the benefits, assets, or money is being exchanged, then you might be looking at a prohibited transaction.

IRS parameters for IRAs can sometimes be confusing. It is much better to invest time into learning about IRS rules before making a move with your IRA, than it is to pay for a mistake with your hard-earned retirement funds. New Direction Trust Company's knowledgeable staff, informative website, and educational programs are excellent sources of information about the self-directed IRA world. Feel free to give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com.

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