Self-directed Iras And 401(k)s -- Top Questions Answered (part 3)
In the previous two posts, disallowed investment options and prohibited transactions as they apply to retirement plans (RP) were reviewed. In the trifecta of IRS regulations governing these retirement plans, there is one (1) additional regulating concern that the plan must adhere to and not violate: Participation of the RP in transactions with Disqualified Persons. Investing with, through, to, etc. a Disqualified Person (DP) is a prohibited transaction for any retirement plan.
Remember, this is educational in nature so as such it is intended for educational purposes only and are frequently asked questions regarding IRS regulations related to retirement plans...whether self-directed or traditional. It is information that is general in nature and should not be viewed as legal authority. But the goal is to provide you with some helpful (hopefully) information related to general issues. As they say, for professional assistance on specific tax questions and issues, you should always consult a tax professional Now, on to the fun stuff.
As noted, in Parts 1 and 2, we have already reviewed disallowed investments and prohibited transactions. A prohibited transaction can also occur when the transaction occurs with a DP. What and who are DPs?
1) A fiduciary of the RP;
2) A person providing services to the RP;
3) An EMPLOYER, any of whose EMPLOYEES are covered by the plan;
4) An EMPLOYEE ORGANIZATION, any of whose members are covered by the plan;
5) Any DIRECT or INDIRECT OWNER of 50% or more of any of the following:
a) the combined voting power of all classes of stock OR the total value of all classes of stock of a corporation that is EITHER an EMPLOYER OR EMPLOYEE organization described in 3 and 4;
b) the capital interests OR profits of a partnership that is an EMPLOYER or EMPLOYEE organization described in 3 and 4; or
c) the beneficial interest of a trust or unincorporated enterprise that is an EMPLOYER or an EMPLOYEE organization described in 3 and 4.
6) A MEMBER of the family of ANY individual described in 1, 2, 3 and 4. This is inclusive of the individual's spouse, ancestor, lineal dependent or any spouse of a lineal dependent.
7) A corporation, trust, or estate of which (or in which) any direct or indirect owner described in 1 - 5 holds 50% or more of any of the following:
a) the combined voting power of all classes of stock OR the total value of all classes of stock of a corporation;
b) the capital interests OR profits of a partnership; OR
c) the beneficial interest of a trust or estate.
8) An officer, director (or an individual having powers or responsibilities similar to those of officers or directors) OR a 10% or more shareholder OR a Highly Compensated Employee (earning 10% or more of the yearly compensation of an employer) of a person described in 3, 4, 5 or 7.
9) A 10% or more (in capital or profits) partner or joint venture of a person described in 3, 4, 5 or 7.
10 Any disqualified person, as described in 1 - 9, who is a DP with respect to any plan to which a multi-employer plan trust is permitted to make payments under Section 4223 of ERISA.
All of this information is courtesy of PGI SelfDirected and IRS Code 408.
Sound complicated? It can be. But with the assistance of a qualified individual dealing with these transactions your ability to invest self-directed IRA/401(k) assets into a myriad of traditional and non-traditional assets is awaiting you. Do some more research and decide if you want to explore this wonderful horizon.
John R. Park is President of PGI SelfDirected (www.pgiselfdirected.com) and co-founding Partner of Fulcrum Investment Network (www.fulcruminvestmentnetwork.com)
