Solo 401k / IRA Disqualified Person
Plan owners of the Solo 401k and self-directed IRA need to be aware of Prohibited Transactions. These transactions usually involve a disqualified person and are not allowed by the IRS. Engaging in a prohibited transaction can lead to expensive tax charges and fines. In severe cases, the self-directed retirement plan may even be disqualified.
Plan owners are recommended to understand the concept of a Solo 401k / IRA disqualified person and follow the IRS regulations closely.
Definition of a Solo 401k / IRA disqualified person
A disqualified person is usually someone who owns the retirement plan, who provides services to the plan, or who may become the beneficiary of the plan.
Categories of Disqualified Person
The IRS defines different categories of disqualified person in the Internal Revenue Code, Section 4975. These categories are:
- The plan owner of a Solo 401k or IRA
- The spouse of the plan owner
- The ancestors and descendants of the plan owner, such as their parents and children. The children’s spouses are also disqualified.
- The fiduciaries of the plan, such as the plan trustee or custodian
- The fund managers or financial advisors
- Entities that the retirement plan holds at least 50% interest, including businesses (corporations, LLC, or partnership), trusts, or estate
Who is NOT
a disqualified person:
In the Internal Revenue Code Section 4975, the definition of a disqualified person does not include step-parents, step-children (not adopted), siblings, aunts, uncles, cousins and friends.
What a disqualified person cannot do
Generally, a Solo 401k / IRA disqualified person is not allowed to enter a transaction with the retirement plan.
A disqualified person cannot extend credit or guarantee a loan for the plan. Also, they cannot personally benefit from the plan’s investments, such as getting a commission for a real estate purchase within the IRA or Solo 401k.
Alternate investment options with your self-directed account:
Investments That Make Sense!
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