Who is considered a disqualified person?

The IRS defines several categories of disqualified persons:

1. The IRA Owner (You)

You, as the IRA owner, are always a disqualified person. This means you cannot:

• Sell or buy assets from your own IRA.
• Pay yourself for managing an IRA-owned investment.
• Use IRA funds for personal expenses or benefits.

2. Your Spouse

Your spouse is also disqualified, meaning they cannot:

• Purchase assets from or sell assets to your IRA.
• Live in or use property owned by your IRA.
• Take a loan from or invest in your IRA.

3. Your Lineal Family Members

The following family members are disqualified:

• Parents (mother, father, step-parents).
• Grandparents.
• Children (son, daughter, adopted children, step-children).
• Grandchildren.
• Spouses of children or grandchildren.

4. Any Entity You or a Disqualified Person Control

If you or a disqualified person own 50% or more of a company, trust, partnership, or estate, that entity is also disqualified. This means your IRA cannot:

• Invest in a business that you or a disqualified person own 50% or more of.
• Loan money to a business controlled by a disqualified person.

Examples of Disqualified Persons in Real-World Situations

Example 1: Buying Real Estate from a Parent

❌ Prohibited Transaction: You find a great investment property that your father owns and want to purchase it using your IRA. This is not allowed because your father is a disqualified person.

✅ Allowed Transaction: You purchase a property from a third party using your IRA.

Example 2: Investing in a Family Business

❌ Prohibited Transaction: Your IRA buys shares in a business that you and your spouse own 60% of. Since you and your spouse own more than 50%, the company is a disqualified entity.

✅ Allowed Transaction: Your IRA invests in a company owned entirely by unrelated parties.

Example 3: Loaning Money to Your Child

❌ Prohibited Transaction: Your IRA makes a private loan to your son so he can start a business. Since your son is a disqualified person, this is not allowed.

✅ Allowed Transaction: Your IRA makes a loan to an unrelated third party.

Example 4: Taking a Distribution Directly from an IRA-Owned LLC

❌ Prohibited Transaction: Your IRA owns an LLC that holds investments, and instead of taking a distribution through the IRA custodian, you withdraw funds directly from the LLC to your personal bank account. This is not allowed because it bypasses the IRA custodian and is considered an immediate taxable event.

✅ Allowed Transaction: The LLC transfers funds back to the IRA, and then you take a distribution through the custodian.

Final Thoughts

Understanding who is considered a disqualified person is critical to maintaining the tax-advantaged status of your IRA. Transactions between your IRA and a disqualified person can result in penalties, taxes, and even disqualification of your entire IRA.

If you’re ever unsure whether a transaction involves a disqualified person, it’s best to consult AET’s support team or a qualified tax professional before proceeding.