Self Directed IRA plan: Partnership with a Disqualified Person?

According to Department of Labor Advisory Opinion in July of 2000, a Self directed IRA can enter a partnership with a disqualified person but not without complication. The original page has discussed the issue in details, with the main points summarized as below.

In short, in certain situations a person can have his or her Self Directed IRA plan or Solo 401k enter a partnership with a disqualified person. However, there are many chances he or she may trigger a prohibited transaction while operating the partnership.

Consider a few points below regarding Self Directed IRA Plan and partnership before making the decision:

1. If, at the time of investment, the LLC or any other entity the plan invests in was a disqualified person, it will be considered a prohibited transaction.
2. Even if the investment is not a prohibited transaction when created, if the interest of the plan and the account holder diverge later, it can be treated as a prohibited transaction.
3. If the disqualified person can only join the investment with financial support from the plan, then the investment made by the plan will be considered a prohibited transaction.
4. Even after the investment is made without causing a prohibited transaction, all actions concerning the partnership that involves transactions between the plan and a disqualified person are still considered prohibited ones. For example, the disqualified person cannot sell or buy shares of ownership to or from the plan to raise capital for the partnership.

So in conclusion, it is not entirely impossible to enter a self directed IRA plan or 401k into a partnership with a disqualified person. However, in certain cases when it is possible to do so, plan holders have a great chance of creating a prohibited transaction when operating the plan.

Therefore, investors are recommended to think twice before entering their retirement plan into a partnership with a disqualified person.

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