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Prohibited Transactions — What are They?

August 31, 2014 by John Park Leave a Comment

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your Self-Directed 401(k). The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your 401(k) account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).”  IRS Publication 590

IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the 401(k); (3) loaning money to a disqualified person; or (4) investing in a prohibited investment.

Bluntly stated, prohibited transactions are those transactions that violate the basic intent of IRS code as it relates to the operation of the 401(k).  Always consider this basic statement:  Your activities with the plan must always benefit the plan and not you personally.  If one always keeps this premise in mind, it will greatly assist them in the “common sense” approach to operating and administering their plan.

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Category: 401(k) Questions, Possibilities & Limitations

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About John Park

John

As co-founder of Fulcrum Self-Directed, John Park believes in the power of self-directed plans tempered by the individual responsibility to operate the plan in compliance with IRS and DOL regulations. As such, Fulcrum Self-Directed is in a unique position to assist a client in establishing an IRS compliance self-directed plan, while guiding clients with their responsibility to operate and administer their plan.

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