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Disqualified Persons

Probably the most basic concept one needs to understand when investing with a self-directed retirement plan is avoiding any self-dealing or dealing with disqualified persons. As defined in IRC section 4975, any direct or indirect transactions or provision of benefit between a plan and a disqualified person – in either direction – results in a prohibited transaction.

Disqualified Persons include:

  • The account holder
  • Their spouse
  • Lineal antecedents such a parents, grandparents, etc.
  • Lineal descendants such as children, grandchildren, etc.
  • The spouse of a descendant
  • An entity such as a business or trust where one or more of the above have controlling interest. Control is exhibited either by greater 49% equity or beneficial interest in an entity, or by executive decision-making power over the entity.
  • Fiduciaries to the plan or those providing services to the plan such as investment advisors or tax counsel.
  • A key employee such as a vice president or a holder of more than 10% ownership interest of a company that is controlled by a disqualified party.
  • A 10% or greater joint venture or partner of a business that sponsors a qualified retirement plan.

These disqualified persons are essentially poison to your retirement plan. Care must be taken not to engage in any transactions where there is a benefit provided to a disqualified party, or where a disqualified party is benefitting the plan via the furnishing of goods, services or facilities.

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