Along with the freedom and flexibility of a self-directed retirement account comes rules that you must be aware of. All retirement plans, whether self-directed or otherwise, must adhere to IRS rules on prohibited transactions. You and your team of professionals must understand IRC Sec. 4975 regarding prohibited transactions and disqualified parties to avoid tax penalties and a potential loss of the account’s tax-advantaged status.
Your retirement plan is not to benefit you (the account holder) or beneficiaries prior to retirement age. Some examples of prohibited transactions include the following:
- selling, exchanging, or leasing personally-owned property to your account;
- lending account funds or extending credit on your account to a disqualified person;
- furnishing goods, services or facilities by the plan to a disqualified person;
- transferring plan income or assets to a disqualified person;
- a fiduciary dealing with income or assets of a plan in his or her best interest; and
- a fiduciary receiving any consideration for his or her own personal account from any transaction involving the income or assets of the plan.
Notable disqualified persons include the account holder; his or her spouse; his or her descendants, ancestors and their spouses; entities in which the account holder is a 50% or greater owner; plan fiduciaries and anyone providing services to the plan.
Along with various blog posts on this site, you may also download additional materials on this topic on our eBooks page. You can also view the IRS web page that discusses prohibited transactions here. Also familiarize yourself with important documents such as IRS Publication 590-A and 590-B and 26 USC 4975.