Is an Ex-Spouse a “Disqualified Person” in a Self-Directed IRA?
When investing with a self-directed IRA, it’s important to avoid prohibited transactions as defined by Internal Revenue Code (IRC) Section 4975. These rules identify specific individuals and entities, known as “disqualified persons,” who are not permitted to engage in certain transactions with your IRA.
One question that comes up frequently is:
Is an ex-spouse considered a disqualified person?
Let’s break that down.
What Is a Disqualified Person?
Under IRC Section 4975(e)(2), a disqualified person includes:
- The IRA owner, also referred to as the fiduciary
- The IRA owner’s current spouse
- Lineal family members such as parents, children, and grandchildren
- Spouses of lineal descendants
- Any entity in which the IRA owner or these family members own 50 percent or more
- Anyone providing services to the IRA
These rules are designed to prevent self-dealing, ensuring that IRA assets are used for investment purposes only and not for personal gain.
Where Does an Ex-Spouse Fit In?
The term “spouse” in the tax code refers to a current legal spouse. Once a divorce is finalized, the ex-spouse is no longer considered a disqualified person under the language of IRC Section 4975.
This opens up potential flexibility that wouldn’t exist with a current spouse or other disqualified individuals.
Why You Still Need to Be Careful
Even though an ex-spouse is not automatically considered disqualified, there are still situations where a transaction could be problematic.
If you and your ex-spouse maintain shared business interests, an entity involved in the transaction may still be disqualified based on ownership or control.
If there are ongoing financial relationships or benefits passing between you and your ex-spouse, those may raise red flags under the self-dealing rules.
The IRS tends to look at substance over form. Even if the parties are no longer legally connected by marriage, a transaction can still be questioned if it appears to offer indirect benefits to the IRA owner.
Best Practices
Before proceeding with any transaction involving an ex-spouse, consult a tax attorney or self-directed IRA expert who is familiar with these rules.
Be sure to fully document the transaction and ensure it’s conducted at arm’s length.
Avoid arrangements that could be seen as serving the personal interest of the IRA holder, even indirectly.
Final Thoughts
Understanding who qualifies as a disqualified person is essential to staying compliant with self-directed IRA rules. While an ex-spouse is generally not considered disqualified after a divorce, the facts and context always matter.
If you’re considering a transaction that involves an ex-spouse or any potentially related party, seek qualified guidance to protect your IRA from costly mistakes.
uDirect IRA Services, LLC is here to guide you every step of the way on your self-directed journey. While we don’t offer investment, legal, or tax advice, we’re committed to empowering you with the tools and support you need to self-direct your retirement savings confidently.
Take control of your financial future today! Contact us for a free consultation or open your SDIRA account now.
