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.