Questionnaire: Is my investment a prohibited transaction?

Created July 09, 2021 16:33

You can use the prohibited transaction questionnaire to help and see if you can make an investment. Customers are responsible for their deal review process at Rocket Dollar, leading to a smoother and quicker process to fund investments.

What type of asset are you investing in?

You can invest in many different assets allowed by the IRS.

What can I invest in with a Rocket Dollar account?

You cannot invest in the following assets, as they represent a prohibited transaction per the IRS.

Collectibles like wine, art, classic cars, baseball cards, beanie babies, antiques, rugs, gems, and metals are not described or approved under 31 USC Section 5112.
Coins and metals that are not approved by the IRS, or meeting purity requirements.
Life insurance
S-Corp stock. S-Corp stock income or losses are passed to shareholders and thus cannot be hidden in special tax treatment retirement accounts.

Will you be lending funds or investing with a family member and their personal funds?

With whom can I invest?

There many close friends and family members that you can invest with who might not immediately come to mind.

With whom can I not invest? The IRS heavily regulates those where you can pass on assets from generation to generation to avoid paying taxes.

Yourself
Parents or grandparents
children and adopted children
Spouses of children
key persons at your company, like highly comped employees or those who have high ownership levels, especially if you own a significant amount of the company

Do you own over 50% of this company? Or are you closely related to key leadership that owns over 10%?

You can invest in companies in which you own less than 50%. Prohibited persons (family) also count to this total.

If you and prohibited persons own over 50% of a company, you might have to exercise caution about conducting deals and transactions with certain key employees. Anyone who owns 10% of the company is a prohibited person.

You can read more in our article, "Can I invest in the company I work at?"

Are you or any family member receive personal gain directly or indirectly as a result of your IRA investment into a company or deal?

Your IRA and retirement should benefit because of your investment actions, not your personal business or a prohibited person's business. Quid pro quo arrangements, where your IRA invests for favors elsewhere, also put your retirement account at risk of audit and being distributed.

You can not live or work directly in any investment you own over 50% in, and a prohibited person should not either. Any working duties should be restricted to managerial tasks.

You can review more specific articles about prohibited transactions in the rest of our knowledge base.

Did you put an extra "dummy layer" in between your transaction and a disqualified person or prohibited transaction that serves no purpose other than trying to make it appear legal?

This is covered in the Step Transition Doctrine — When you try to put a straw person as a layer in between a prohibited person or prohibited transaction, it is still a prohibited transaction.

Are you transacting or about to transact?

When an asset is sold, bought, or sometimes terms are renegotiated with another party, you are engaging in a transaction, according to the IRS. It is at these times when following the rules closely is the most important. If you are not renegotiating the deal with you and other parties, you are more likely to stay in the clear. A common example of this...

You invest with an unmarried partner from your IRAs. This person is not a prohibited person at this time. You both marry. Now, new deals with this person would be under restrictions as a prohibited person. You both decide NOT to renegotiate your old investment until the investment is finished, sold, and the deal/investment is exited under the original terms. Renegotiating the deal and giving more favorable or different terms now that you are married could lead to an increased risk of a prohibited transaction. You are currently dealing with a prohibited person, where if you had stayed unmarried, you could have renegotiated an unlimited number of times.

What are the penalties if I broke any of the above?

Breaking any of these rules puts your Self-Directed IRA at risk of distribution or Solo 401(k) of fines.

I'm not sure if my situation is a prohibited transaction. Can I discuss it with someone?

You can feel free to call our sales line (1-855-762-5383) to discuss general rules, best practices, and regulations to make the rules more clear. We can only speak generally and cannot give any tax, investment, or final prohibited transaction legal advice. For advanced cases, we have a lawyer and CPA experienced in the self-directed retirement space that we are happy to refer you to who can do a complimentary call and then would be bill per hour of service.