Self-directed IRAs can feel like a backstage pass to more investment options. You can explore real estate, private deals, and other alternatives that a regular IRA often does not offer. That freedom comes with a few rules that can trip people up quickly, and the disqualified person rule sits near the top of the list. Here’s who is a disqualified person in an SDIRA.
The Simple Idea
A disqualified person is someone the IRS treats as too close to your SDIRA transactions. The IRS wants to stop you from using IRA money in ways that give you or certain related people an unfair personal benefit. When you keep disqualified people out of your IRA deals, you lower the risk of a prohibited transaction.
People Who Count as Disqualified
Start with the obvious. You count as a disqualified person for your own IRA. Your spouse also counts. The rule then moves up and down your family tree. Your parents and grandparents count as ancestors, and your kids and grandkids count as lineal descendants. The spouses of your lineal descendants count too, like your child’s spouse.
People often ask about siblings, cousins, and in-laws. The core family definition focuses on spouse, ancestors, lineal descendants, and spouses of lineal descendants. Other relationships can still create trouble if a deal gives you a personal benefit, so you still want to think carefully.
Fiduciaries and Service Providers
The list also includes people who influence or manage IRA decisions. If someone serves as a fiduciary for the IRA, that person is disqualified, too. In plain terms, if someone can control or significantly influence how the IRA uses its funds, the IRS closely monitors transactions with that person.
Businesses and the 50 Percent Rule
Entities matter just as much as individuals. A corporation, partnership, trust, or LLC can count as disqualified when disqualified people own 50 percent or more of it. People call this the 50 percent rule, and it comes up a lot when someone wants an IRA to invest in a business they already own.
Why It Matters
A prohibited transaction can trigger serious tax consequences and undo the tax-advantaged status you expected. So protecting your retirement account means more than picking good investments. It means keeping a clear boundary between your IRA and the people and entities the IRS flags as disqualified.
A Few Everyday Examples
If your SDIRA buys a vacation rental, you and your spouse cannot use it, even for a weekend. If your SDIRA wants to lend money, it cannot lend to your child or to a company your child controls. If you own more than half of an LLC, your IRA cannot buy into that same LLC.
I like to think of disqualified persons as the inner circle around your SDIRA. The closer the relationship or level of control, the more cautious you need to be. Spotting those relationships early lets you structure deals properly and keep your SDIRA focused on long-term growth rather than avoidable penalties.
- Which SDIRA scenario is most likely to trip someone up: a family-related deal, personal use of a property, or investing in a business they already own, and why?
- How would you explain the concept of a disqualified person to a friend who thinks the rule applies only to spouses and kids?
- Where do you think people get confused most often, family relationships like in-laws and siblings, or entity ownership like the 50 percent rule?
- What practical steps would you take before making an SDIRA investment to confirm no disqualified person or prohibited benefit shows up in the deal?
- How do you balance the flexibility of an SDIRA with the extra compliance work, and when do you think that tradeoff stops making sense?
