What is a disqualified person 401k?

A “disqualified person” is defined as a trustee, you, a member of your family, or any other entity, such as a corporation, partnership, trust or estate that is 50% or more controlled by you or your family members. For a 401k sole plan, you, the individual owner of the 401k, are a trustee. A plan trustee (for example, the result of participating in Solo 401k PT Reasons why Solo 401k plans are subject to fraud). Generally, a disqualified person is a person who owns the retirement plan, who provides services to the plan, or who can become the beneficiary of the plan.

Prohibited transactions are just that, transactions that aren't allowed on the Solo 401k plan. The guidelines on prohibited transactions are found in section 4975 of the Internal Revenue Code. Prohibited transactions usually have the same rules for Solo 401k and self-directed IRA plans. You can also learn more about prohibited transactions directly on the IRS website.

Too many people seem to think that the list is just “the account holder and their family”. As you can see, it's a little more complicated than that. This doesn't require calculations, but you should write the list step by step to make sure it's complete. In fact, this list can be quite extensive if you, a member of your family, or anyone who provides services to your plan own several companies.

A tiered transaction is when you include a third party in the transaction to make it appear that the transaction is not prohibited. Even if you committed a prohibited transaction by accident, the tax consequences are the same. Generally, your Solo 401k will have to pay federal taxes and fines. If you quickly correct a prohibited transaction, you can avoid the 100% tax.

Correcting the prohibited transaction basically means undoing the transaction without damaging the plan. The plan must be completed to the extent possible and everything must continue as if it had adhered to the highest “fiduciary standards” from the start. If you believe that you have made a prohibited transaction, you should correct it as soon as possible within the taxable period. If the IRS finds out about the transaction, it can send you a notice of default if the transaction is not corrected within the tax period in which the transaction was made.

The disqualified party usually has an additional 90 days after receiving the notification to correct (undo) the transaction. If appropriate steps are taken to correct the prohibited transaction within the established time frame, the IRS will generally credit, refund, or reduce the 100% tax that was charged. Before we talk about prohibited transactions, it's important to understand what a “disqualified person” is. The IRS generally defines a disqualified person as the owner of the account (you) and certain family members.

In addition, entities that are directly (or indirectly) connected to your individual 401 (k) account, such as an LLC that is under the control of you or one of the members of the prohibited family under 50% (or more). However, not all family members are included in this. Ancestors, including your father, mother and grandparents, and your direct descendants by line, such as your spouse, children and grandchildren, are disqualified individuals. However, indirect descendants and non-relatives are not prohibited.

This includes friends, siblings, uncles, nieces, cousins and stepchildren. In general, a prohibited IRA transaction is any misuse of an IRA account or annuity by the owner of the IRA, its beneficiary, or any disqualified person.