Prohibited Transactions Self Dealings — Video

Prohibited transactions self dealings, is a subject that can be confusing. It’s confused me more than once. How ’bout you?


Transcript:   Hi, this is John Park, with PGI Self-Directed and contributor to BawldGuy Talking. Today’s video post is going to be the third of the entire process we’ve been talking about with IRS Prohibited Transactions. The third Prohibited Transaction that I’m going to be referring to is what’s commonly called self-dealing. Self-dealing by itself is fairly understandable. What does it mean to a retirement plan? Here’s the simple concept of what you want to remember, when you are directing your self-directed IRA or your self-administered 401k, you are responsible for the investments of that plan. That’s a given. The IRS specifically prohibits you, or any of those disqualified individuals we talked about in the previous video, from benefiting from that relationship to the plan. Nor can the plan benefit from its relationship to you. How you always want to think about it is, think of it as if your retirement funds belong to somebody else. You’re making the best investment choices you know how to make for that person’s money. You have to think the same thing for your retirement plan. You’re making the best investment choices for that plan, with no regard to your personal or selfish interest. What’s an example of a self dealing benefit? Let’s use a simple one. Let’s say you bought a rental property and you’re a guy who just likes to … or a lady who likes to just do the sweat labor. You say, “You know what? John was telling me before about self-dealing. John was telling me I can’t do things free for the plan. I’m going to buy this rental property. As compared to hiring BawldGuy and him charging me $50 an hour to go fix the roof or fix the toilet, you know what? I’ll have the plan pay me $20 per hour. What am I doing? I’m putting some money in my pocket for the time that I spent but I’m also charging myself something, so I‘m not providing a benefit to the plan.” Now, you call me up and you go, “That has to be okay. That’s not a prohibited transaction because I’m saving the plan money.” Absolutely wrong, just by the very fact that you received a benefit from your plan, even if it was one penny you’ve now tripped that self-dealing prohibited transaction because you now personally benefited. Your only role with the plan is to make the best investment choices for the plan and follow IRAs rules. Now you think you got me and you go, “Hey, if my retirement plan … I didn’t charge it anything and I went out and did the work and of course, the plan pays for any materials, et cetera, but I’m going to do the labor for free, that can’t be a prohibited transaction because I’ve now not benefited from that relationship.” Incorrect again, because now what the IRS would most likely say is, “You actually benefited the plan because the plan is not a person, it’s an entity. If the property has to be repaired and the plan owns that property, who’s going to do the work? It can’t be the plan, it’s not a person and you can’t provide any benefits back to the plan.” Just remember the moral of the story is whether it’s the labor, whether it’s the material, all expenses for the plan has to be paid by the plan. Some other examples of what self-dealing might be is with the sale or the lease of a property. We talked about this before in another video. You can’t have a disqualified individual, a son, a daughter, a mom, a dad, living in that property or doing the work on that property. Anybody else who is providing or furnishing any services, any goods, they’re going to be considered a prohibited individual if they are … what we talked about in previous video, a disqualified individual, a blood line ascendant, descendant, you, your spouse, service providers, fiduciaries, et cetera to the plan. I hope you enjoyed this video. I hope it provided some good, meaningful information about self-dealing. Always keep one thing in mind, you have to stay separate from the plan and the plan has to separate from you. This is John Park. I hope you enjoyed the video and I look forward to seeing you next time.

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About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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