Disqualified individuals include the IRA owner's trustee and family members (spouse, ancestor, linear descendant, and any spouse of a linear descendant). The following are examples of possible transactions prohibited with an IRA. Every self-directed IRA comes with a list of people and entities that aren't allowed to interact with it in certain ways. These parties are called disqualified individuals, and if they make prohibited transactions with your IRA, your IRA could lose your preferred tax status.
There are some transactions that aren't allowed with self-directed IRAs, and there are some disqualified people who aren't allowed to do business with self-directed IRAs. Because the IRS prohibits your IRA from negotiating with disqualified people, you may not know that you can associate funds with a person who is disqualified from investing. In addition, it is essential to recognize that, for a transaction to be considered a prohibited transaction, only one of the above-mentioned exchanges need to take place between the owner of the IRA (or another disqualified person) and the IRA. However, it should be noted that a prohibited transaction between a disqualified person and an IRA involves two parties: the disqualified person who made the transaction and the retirement plan itself.
Prohibited transactions themselves may include buying or selling property between the IRA and a disqualified person, making IRA assets available to a disqualified person, or using IRA funds to compensate a disqualified person. While the rules about people who don't qualify for a self-directed IRA and prohibited transactions are important, these are the short lists. For example, your self-directed IRA is prohibited from selling property or buying property from a disqualified person. The fact that one of the prohibited transactions occurred between the IRA and a disqualified person is sufficient to cause adverse consequences.
The IRS does its best to explain your IRA's prohibited transaction with disqualified individuals. In fact, the GAO expresses concern that some types of alternative investments are sold in self-directed IRA accounts in a way that enriches the seller or promoter if the deal closes, but denies any liability if the investment turns out to be a prohibited transaction, since in situations where the self-directed IRA provider offers “checkbook control”, it ultimately remains the owner of the IRA to determine that each and every one of checks comply with prohibited transaction rules. Your IRA and its partners who are disqualified individuals cannot sell properties to each other. While the most “common” disqualified person associated with an IRA is the owner of an IRA himself, it's important to note that family members are also disqualified people.
The list of disqualified individuals also includes any other person or entity related to your self-managed IRA, such as trustees, managers, advisors, or anyone providing services to the account. In addition, any corporation, partnership, trust or estate in which disqualified individuals have a stake of 50 percent or more are not allowed to transact with their IRA. You can even associate your IRA funds with your personal investment funds, and IRAs can be associated with other IRAs, as long as you do so in accordance with IRS regulations.