Earlier this week, we talked about investment ideas for your self-directed IRA. That was just a sampling of the things you can do with your pension plan. You can find out more in Tax Free Real Estate Investments, part of the Smart Business Smart Investment two for one special this week.
There’s a lot you can do with your pension. And there are some things you can’t do. Today, we’ll look at some things you can’t do. The following is an excerpt from Tax Free Real Estate Investments.
Secret #4: Stay Legal – Avoid Prohibited Transactions, Disqualified Persons, and Prohibited Investments
Prohibited transactions are types of investments that you can’t do. Disqualified persons are people that you can’t use your pensions funds to invest for or with. Prohibited investments are things you can’t invest in. In other words, these three categories – prohibited transactions, disqualified persons and prohibited investments – are all things you must avoid with your self-directed funds or risk huge tax penalties. Let’s take a look at all three of these in more detail.
Prohibited transactions include:
- The sale, exchange or lease of any property between a plan and a disqualified person
- The furnishing of goods, services or facilities between a plan and a disqualified person
- Using any portion of your pension fund as security for a loan by a disqualified person
- Use of income or assets of a plan by a disqualified person for her own benefit.
So far, everything we’ve discussed is straight out of IRC Section 408 and the Treasury Regulations related to that section. But while prohibited transactions are fairly straightforward, there is a little confusion when it comes to exactly defining who a disqualified person could be.
The definition of a disqualified person includes the owner of a plan and any beneficiary of the plan.
Depending on how you interpret IRC Section 4975, a disqualified person can also be a family member who isn’t listed as a beneficiary. For example, this rather unclear Code Section seems to indicate that your children might be considered disqualified, even if you disinherited them from your pension.
This is a very short list! Prohibited investments include:
- Collectibles such as art, rugs, antiques, metal, gems, stamp, coins, alcoholic beverages, or other tangible personal property
- Life insurance
The rules are pretty stringent when it comes to investing with your pension plan. But the good news is that it’s clearcut. Follow the rules and you can invest tax free!
Learn more in Tax Free Real Estate Investments.