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Prohibitive IRA Transactions
Assessing Prohibited Transaction (PT) Risk

Determining whether a proposed transaction is actually a PT is hard. But determining whether something might be a PT is easy. Following is the three-step process:

1. Disqualified Persons: The first step in determining PT risk is to make a list of disqualified persons. This list should include your spouse, ancestors, lineal descendants (children, grandchildren, etc.) and spouses of lineal descendants. Also include anyone who provides services to your retirement plan.

2. Assesses Transaction: If a proposed transaction involves (or is expected to involve in the future) a person on the disqualified persons list in any way -- stop. It might be a PT. At this juncture, you have two options: (i) either don’t do the transaction; or (ii) seek guidance from a qualified professional before proceeding.

3. Get Help: It is extremely important not to proceed if you have one iota of doubt about a transaction you are about to make that includes a disqualified person. As mentioned above, seek help from a qualified professional.

It’s important to note that “involves in any way” (from #2 above) includes involvement of an LLC, trust, corporation or any other entity that has a disqualified person as part or whole owner, director, officer, employee, etc. Prohibited transactions also include any scheme that intends to use plan assets to benefit a disqualified person, even if it does so indirectly.

If you can’t adhere to these three guidelines, you shouldn’t open a self-directed account regardless of checkbook control because the risks are the same. If you are at risk of not strictly adhering to PT rules, then a custodian’s vow of “we’ll keep you safe” won’t protect you from the account terms and conditions. And, you will be the one to pay the price – literally and figuratively – if the custodian overlooks a PT.

PT Noncompliance Overview

Back to the big picture for risk of PT noncompliance; remember the following and you’ll be fine:

If you dismiss PT rules and transact at the custodial level, you are at high risk.

If you dismiss PT rules and you transact with checkbook control, you are at high risk.

If you follow the simple, three-step PT risk determination process described above and you transact at the custodial level, you are at low risk.

If you follow the simple, three-step PT risk determination process described above with checkbook control, you are at low risk.

If you do a PT at the custodial level, you pay the consequences.

If you do a PT with checkbook control, you pay the consequences.

When viewed in this light, there is actually no substance to the anti checkbook control argument. As outlined here, it’s relatively easy to determine PT risk.

When in doubt, consult a qualified attorney who is the only professional that can dispense definitive, binding advice. Remember: your risk is absolutely identical, whether or not you have checkbook control: Ultimately all decisions – and the consequences that result from them – are your responsibility.