Of all the rules important for managing a Self-Directed IRA, it just may be one of the most important: knowing how to avoid transacting with a “Disqualified person” within a Self-Directed IRA. From a bird’s eye view, the concept is simple: you should avoid investing and transacting with someone with whom you may have a personal attachment, such as a spouse or a child. For example, you would not be able to issue a private loan from a Self-Directed IRA to help your child go to college—these would have to come out of personal funds.
Why is this the case? Simple: retirement accounts are set up specifically to ensure that investors have separate retirement money put away. Utilizing investments to realize a personal benefit is counter to this purpose. For that reason, the IRS does not want individual investors with a Self-Directed IRA—or any IRA, for that matter—to transact with “disqualified persons.”
But what can you do to ensure that you do not do things the wrong way? Let us look more closely at who constitutes a disqualified person within a Self-Directed IRA, and what you can do to avoid transacting with one.
How the IRS Defines Disqualified Persons
To get a better sense of what we mean, why don’t we look right at the source? At IRS.gov, you’ll see the topic of prohibited transactions as they relate to retirement accounts. You can further follow the links to get a more in-depth exploration of this topic by clicking here. There, the IRS defines a disqualified person as including a fiduciary of the plan, a person providing services to the plan, a member of your family, an employer, or any direct or indirect owners as defined at the IRS. The list of disqualified persons also includes members of the family of individuals described earlier at the IRS website, such as a spouse, ancestor, lineal descendent, or the spouse of a lineal descendant.
That is a lot to digest. What does it mean, exactly? It means that the IRS makes sure there is no easy way to wiggle around this: your retirement investments are for retirement. Receiving personal benefit or doling out personal benefits to someone you know personally or who may have influence on the account is something to be avoided.
How to Stay Away from Prohibited Transactions
When you use a Self-Directed IRA, stick to a rule of thumb: avoid transacting with anyone you know who could provide any sort of personal benefit to you. This means, for example, that if you were to purchase an investment property within a Self-Directed IRA, then you would seek out tenants with whom you had no prior relationship. While this might seem restrictive to your ability to find tenants, the truth is that investing this way is very common. And with a retirement account, you will have all of the added tax benefits that come with keeping your retirement and your personal funds separate.
These are important rules for every Self-Directed IRA investor to know. But beyond knowing the basic rules that play into Self-Directed IRAs, it is important to know why they exist. If you understand why these rules are in place, you will find it much more intuitive to understand which kinds of investments you can make with a Self-Directed IRA. And using a Self-Directed IRA, you will have access to nontraditional retirement assets such as real estate, precious metals, private loans, and much more. This gives you a great degree of flexibility.