Who Is a Disqualified Person and Why It Matters

When investing through a Self-Directed IRA, understanding who qualifies as a disqualified person is critical. These rules are designed to prevent self-dealing and improper personal benefit from retirement accounts that receive special tax treatment. Even an unintentional mistake can result in serious consequences, including taxes, penalties, and the potential disqualification of the entire IRA.

Below is a clear explanation of who is considered a disqualified person under IRS rules and why these definitions matter for Self-Directed IRA investors. ‍

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The IRA Owner

The IRA owner is always considered a disqualified person with respect to their own account. This means the account holder cannot personally benefit from assets held inside the IRA.

This matters because personal use, management, or labor connected to IRA owned assets can trigger a prohibited transaction. ‍

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Example

An IRA owner cannot personally repair or renovate a rental property owned by their IRA. ‍

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The IRA Owner’s Spouse

A spouse is treated the same as the IRA owner for disqualified person purposes.

This matters because any transaction that is prohibited for the IRA owner is also prohibited for their spouse. ‍

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Example

An IRA cannot purchase a property from the IRA owner’s spouse or rent property to them. ‍

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Lineal Ascendants and Descendants

This category includes parents, grandparents, children, and grandchildren.

This matters because the IRS prohibits transactions that directly or indirectly benefit close family members up or down the family line. ‍

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Example

An IRA cannot loan money to the IRA owner’s child or purchase a property from a parent.

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Spouses of Lineal Ascendants and Descendants

Spouses of parents, children, and grandchildren are also considered disqualified persons.

This matters because the IRS extends the rules to prevent indirect benefit through marriage.

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Example

An IRA cannot buy real estate from a son in law or daughter in law.

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IRA Beneficiaries

Any individual or entity listed as a beneficiary of the IRA is considered a disqualified person.

This matters because beneficiaries may not receive benefits from the account before it is distributed according to IRS rules. ‍

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Example

An IRA cannot make a loan to a person named as a beneficiary on the account. ‍

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Fiduciaries and Decision Makers

This includes anyone with discretionary authority or control over IRA investments.

This matters because fiduciaries are prohibited from using their position to benefit themselves or related parties. ‍

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Example

An individual who controls investment decisions for an IRA cannot sell their personally owned asset to that IRA.

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Entities Owned or Controlled by Disqualified Persons

Corporations, partnerships, LLCs, and trusts owned or controlled by disqualified persons are also considered disqualified.

This matters because the IRS evaluates ownership and control, not just individual names, when determining compliance. ‍

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Example

An IRA cannot invest in an LLC that is majority owned by the IRA owner or their spouse.

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Certain Service Providers to the IRA

Anyone providing services to the IRA related to its assets is considered a disqualified person with respect to those services.

This matters because service providers cannot receive improper compensation or personal benefit. ‍

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Example

A disqualified person cannot be paid by the IRA to manage or perform work on IRA owned property. ‍

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Who Is Not Automatically a Disqualified Person

Siblings, cousins, aunts, uncles, and friends are not automatically classified as disqualified persons.

This matters because although these individuals are not prohibited “by definition”, transactions must still avoid indirect personal benefits or self-dealing. ‍

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Example

An IRA may purchase property from a sibling if all other IRS rules are properly followed. ‍

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Why Disqualified Person Rules Matter

Disqualified person rules are strictly enforced to protect the tax advantaged status of retirement accounts.

This matters because a prohibited transaction can cause the IRA to be treated as fully distributed as of the first day of the year in which the violation occurred, potentially resulting in taxes and penalties. ‍

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Example

Using IRA owned real estate for personal use can cause the entire IRA to lose its tax deferred or tax-free status. ‍

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Final Thoughts

Disqualified person rules are highly technical and fact specific. Before entering into any Self-Directed IRA transaction, account holders should consult with their CPA, financial advisor, or attorney to confirm compliance with IRS regulations.

Mountain West IRA acts as a neutral third-party administrator and does not provide tax, legal, or investment advice. All investment decisions and due diligence are the responsibility of the account holder. ‍

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