Given the tax benefits afforded to IRA accounts, the IRS has a keen interest in ensuring that your retirement account is not used in a way which will provide you (personal) benefit prior to paying your due tax. With that said, there are a number of guidelines you must familiarize yourself with to avoid penalties for violating these rules. This is especially true in the case of an IRA LLC (checkbook control IRA), as you will be in complete control of the asset and/or cash owned by your IRA account. Before diving in to the prohibited transactions rules, its crucial you understand who is a disqualified person from your IRA account.

Overview of the IRA Disqualified Person Rule:

A disqualified person is an individual or entity (Business, Trust, etc.) that has been determined by the IRS to be forbidden from transacting with an IRA account, which includes anything owned by an IRA account. Below you will find a distilled list identifying the most common disqualified persons as defined by the IRS. The full list and additional information on the Disqualified Persons may be found in IRC Section 4975(e) (2).

Disqualified Persons are:

  • Fiduciaries to the plan:
    • This would include anyone, or any entity, acting in a fiduciary role or providing services to the IRA account. This includes the IRA owner.
  • Family members:
    • Certain members of the IRA owner’s family are considered disqualified persons; but not all family members. Disqualified family members include: the IRA owners spouse, the IRA owners children as well as their spouses, any grandchildren and their spouses they have, the account holders parents, as well as their grandparents.
  • Disqualified Entities:
    • Entities which are majority owned or controlled by one or more of the aforementioned disqualified persons. Ownership is defined as 49% or more ownership and/or control by disqualified persons.
  • High ranking employees of disqualified entities.
    • These are Officers, Directors, 10% or more owners, or highly compensated employees of entities that are owned by a disqualified person/entity. Generally these are important people within the organization with considerable control over operations. Your IRA is prohibited from transacting with them as well.

Below you will find a visual representation of the disqualified persons to your account. 

As you can see, there are certain people and entities which are considered disqualified from certain actions dealing with your IRA account and any investments made by the account. In my experience most common scenario is an IRA owner wishing to purchase something from, or for use by, a disqualified person – which is simply not allowed. This is quite common in real estate transactions. So before heading down your self directed journey, you will want to make sure you understand who your IRA will be transacting with.