There is a lot of discussion about “Disqualified Persons”
when one is creating a strategy for acquiring IRA assets. The IRS’s
disallowance of self-dealing with regard to retirement accounts means that if
an investor is considering transactions such as purchasing real estate,
investing in a company, making a loan, or even buying hard assets like precious
metals, they need to identify persons who are disqualified to their IRA in
order to avoid a prohibited transaction and its concomitant penalties.
It may sound like a simple matter to list those people and
entities that are disqualified, but the fact that there are several pages of
the Internal Revenue Code (section 4975) dedicated to this issue indicates just
how gray this area can get. To make this matter even a little more difficult to
keep straight, partnering with these “disqualified” persons is allowed. While an
exhaustive examination of this issue may not be desirable (or even possible),
it is helpful to review a few of the basics.
Disqualified persons include one’s self, one’s spouse,
lineal ascendants and descendants and those descendants’ spouses. The designation
also extends to business entities owned and/or controlled by these people as
well as some fiduciaries associated with these business entities.
Transactions in which an IRA is not allowed to participate
with a disqualified person/entity include buying from, selling to, paying
compensation to, extending credit to, receiving a loan from, and allowing use
of assets.
Partnering with disqualified persons/entities is allowed. The
way that works is that an IRA acquires a specified percentage of the asset as
does each of the other partners. All income and payments related to that asset
must be divided along the percentage lines established at the purchase of the
asset. This can be somewhat cumbersome, depending on how much activity is
associated with the investment, but it is imperative to keep up with this
arrangement.
A helpful way to think about whether you are contemplating a
transaction with a disqualified person/entity, which is prohibited, or a
partnership, which is allowed, is to think of a negotiating table on which a
transaction will be made. On this table, money will move from one side of the
table to the other, and, in return, a benefit or asset will move in the opposite
direction. If the disqualified person/entity is on the same side of the table
as your IRA, you are likely okay. If the disqualified person is on the other
side of the table, you might be looking at a prohibited transaction.
In some cases, IRS parameters for IRAs can be confusing. The
information above that describes some basic principles that apply to
disqualified persons and what an IRA can do in relation to them is only part of
the whole picture. Despite the fact that it can daunting, it is much better to
invest the time to learn about the rules now, before making a move with your
IRA, than to pay for a mistake with your hard earned retirement funds later.
The good news is that you have a place to start the process in Entrust New
Direction IRA. Their knowledgeable staff, informative website, and frequent
educational programs are excellent sources of information about all aspects of
IRAs.
