Understanding Prohibited Transactions

Many people find that they have a difficult time turning their self directed IRAs into money gaining investments. The most common reason for this is simply not understanding or misunderstanding the rules that dictate prohibited transactions. Unfortunately, these rules can often seem to be written in a way that makes them incredibly difficult to understand. It is your job, then, to do your research and to make sure you fully understand prohibited transactions, and what is not before you make a move.
One of the most important things you need to know is who counts as a “disqualified person” in your retirement plan investments. In most cases, this is actually fairly straightforward. The IRA holder, any lineal ascendants or descendants of that person, and any person or business that is considered a “controlling interest” due to an ownership share with a disqualified person are ineligible. Employers and any employee organizations also fall under this category.
However, it is extremely common for IRA holders to work with family members on such endeavors. This is why you need to be especially careful when planning your transactions. You need to keep the rules in front of you at all times and check to make sure that you are adhering to them. In short, don’t try to cheat the system in any way. Some people, for example, may decide that they are ineligible but that they can use outside entities to make a profit. However, if these people receive any kind of indirect personal gains from their dealings, they will often be punished for their actions. As a result, you should always ask yourself who is negotiating the entity, who is going to carry out the agreement terms, and whether or not the use of the plan assets will benefit a disqualified person.
When you look at it this way, you can begin to understand how important the definition of a “controlling interest” becomes. It is not enough to simply define the controlling interest as an amount owned by a disqualified person. You must ask whether you or any unqualified people will be receiving a benefit from the transaction. If so, then you’re most likely not playing by the rules.
Always assume that the IRS tax commissioner is going to examine the broad percentage guidelines of your dealings. Even if you do not deal dishonestly on purpose, you can still find yourself in a world of legal trouble. For best results, hire a lawyer or someone more informed to manage your transactions. For a small additional fee, you can have someone always checking over your shoulder to make sure that you are doing the right thing. The big organizations will do anything they can to make a dollar – including finding problems or disqualifications no matter how hard they may have to look. Always aim to be honest and to take responsibility for your own dealings. In the end, this will pay off more than anything else.

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