By: Daniel Gleich
Key Points
- A Self-Directed IRA disqualified person is an individual or entity prohibited from engaging in transactions with your IRA, typically including the account holder, family members, and certain businesses.
- Self-Directed IRAs (SDIRAs) can be compromised if account holders are not conscientious of prohibited transactions.
- Having your SDIRA mingle with disqualified individuals may result in significant tax penalties alongside losing its tax-advantaged status.
What is a Self-Directed IRA Disqualified Person?

Self-Directed IRA disqualified person refers to individuals and entities who are barred from transacting or benefiting from your retirement account. The IRS has established clear regulations for Self-Directed IRAs (SDIRAs). These are mandated in the hopes of ensuring that IRAs serve their intended purpose: to generate income for retirement. If you happen to engage in transactions with disqualified persons, your SDIRA may promptly be distributed in entirety. How can you be certain you don’t dip your account in treacherous waters? We’re here to throw you a lifeboat.
Why Is There a Rule for Self-Directed IRA Disqualified Persons?
When it comes to IRA decorum, being mindful of Self-Directed IRA disqualified persons is a widespread affair. This is due to the distinctive characteristics of the alternative assets allowed within self-directed accounts.
Some standard IRAs that are held at brokerages and banks typically limit account holders to investing in products affiliated with public markets such as stocks, bonds, and mutual funds. Self-directed accounts allow for alternative investments, granting investors access to assets like real estate, precious metals, promissory notes, crowdfunding and startup initiatives, and more. These investments don’t possess available market prices. Because of this, the IRS employed a set of rules to all IRAs – specifically the prohibited transaction and disqualified person rule – to remove the possibility of account owners unfairly benefiting.

Furthermore, since the purpose of a retirement account is to support you during your retirement, these rules were also established in the hopes of preventing you from using your funds for present day benefiting.
What Makes Someone a Disqualified Person?
There are different groupings when it comes to Self-Directed IRA disqualified persons, but your safest bet is to seek third parties for all your SDIRA endeavors. Nevertheless, verified disqualified persons are:
You and Your Spouse
While your Self-Directed IRA is active, you cannot directly benefit from its accruement. Your spouse can co-own and can inherit, but as they are too intricately linked to you, they are not eligible to partake in transactions with your SDIRA.
Lineal Ascendants and Descendants
This includes your parents, stepparents, your partner’s parents, ancestors, children, grandchildren, adopted children, and your children and grandchildren’s spouses.
Closely Held Corporations, LLCs, Partnerships, Etc.
These are any sort of business where you or a disqualified person directly or collectively owns 50% or more.
Your Employer
Having your employer engage with your SDIRA can signal that there is a clandestine business partnership, alluding to you possibly reaping current financial profit.
Plan-Related Service Providers
Any fiduciary or advisor of your Self-Directed IRA is considered a Self-Directed IRA disqualified person. Accountants and attorneys can also be clumped into this, as they may also participate in managing or advising your IRA’s investments.
Any Entity Where a Disqualified Person Holds Influence Over Said Entity
This can comprise of corporations, partnerships, trusts, or estates where a Self-Directed IRA disqualified person holds a leadership role, such as the director or team leaders of the entity.
Though most of your family members are unable to transact with your Self-Directed IRA, your aunts, uncles, cousins, nieces, nephews, and siblings-in-law are all given the go-ahead. This also pertains to these respective relatives in relation to your spouse.
Aside from Self-Directed IRA Disqualified Persons, What Renders a Prohibited Transaction?

Per-se prohibited transactions – or transactions involving disqualified persons - are arguably the most common prohibited transaction. There are two other types of prohibited transactions that SDIRA holders should consider. The first coincides with the former and is called a self-dealing prohibited transaction. This involves you – as the account holder - gaining some sort of personal benefit from your investment.
Let’s say you use your Self-Directed IRA to invest in a vacation rental property. You decide during your own holiday that you’d like to stay on your investment property. This is because you’re using something associated with your SDIRA and reaping its rewards in present times. This example also applies to per-se prohibited transactions. If you chose to rent your investment property out to any Self-Directed IRA disqualified person, it would also result in a prohibited transaction.
If you ever wanted to personally own or access your investment property, this would have to occur later in your investment journey. Generally, this would be achieved by distributing your real estate in-kind. This process would take years, and its conclusion would still likely take place during your retirement.
Extension of Credit Prohibited Transaction
Remaining, stands the extension of credit prohibited transaction. This arises when you secure financial assistance incorrectly from a third-party lender. If you’re in need of a loan, the best type to pursue is a non-recourse loan. These were developed and designed to suit Self-Directed IRAs, unlike traditional loans. While traditional loans have you personally guaranteeing the repayment, non-recourse loans make your SDIRA responsible for repayment.
In the event of default, non-recourse loans will have the collateral be your SDIRA investment such as a rental property. If you’ve funded your SDIRA through a traditional loan, it appears you’re attempting to benefit your retirement account as you are personally guaranteeing the loan. This would equate to an extension of credit prohibited transaction.
What Happens if I Engage with a Self-Directed IRA Disqualified Person?
An immediate repercussion could be a disqualification of your entire IRA on the first day of the year the transaction ensued. If your account is a Self-Directed Traditional IRA, your gains grow tax-deferred, meaning you would owe income taxes on the entire amount in the year of distribution. (This would not apply to Self-Directed Roth IRAs as earnings develop tax-free.)

Regardless, if you’re under the age of 59 ½, you will be subject to a 10% early withdrawal fee according to the entire amount that was contained within your SDIRA. The IRS also has the ability to impose a 15% additional excise tax on the total associated with the prohibited transaction. All the above combined could potentially push you into a higher tax bracket, which may lead to further complications when it comes time to file your annual taxes. In a single stroke, you could manage to eradicate a massive chunk of your retirement savings.
Considerations for Potential Self-Directed IRA Security

It’s considered best practice that you familiarize yourself with prohibited transactions. Though the IRS mandates that all SDIRAs are held by a Self-Directed IRA custodian, their involvement is merely passive. They cannot offer any financial or investment advice, but they can provide educational resources. Congruent to learning, you may find it helpful to consult with a financial advisor or legal professional to be certain that your planned transactions align with compliancy. Continue to stay informed by periodically checking the IRS site to learn of any rule changes and updates.
Creating a Savings Safe Haven
At Madison Trust, we strive to provide exceptional customer support to all Self-Directed IRA holders. We’re eager to meet your curiosities with compassion. Self-directing is one of the greatest ways to take the reins on your retirement and uncover your inner self-empowerment. Schedule a free consultation call with one of our Specialists and discover the opportunities awaiting you.