Why your labor is treated as a contribution
When you personally perform services on a plan-owned asset, you are providing something of value to the plan. By adding value to the plan outside of allowable cash contributions, you are benefiting the plan in a way that is considered a prohibited transaction.
The prohibition applies regardless of whether or not compensation occurs. You clearly cannot be paid by your plan, and uncompensated labor constitutes a furnishing of services under IRC Section 4975(c)(1)(C).
What counts as prohibited sweat equity
The rule is most commonly triggered in real estate investing, where the temptation to save money by doing the work yourself is strong. Examples that constitute prohibited sweat equity:
- Performing repairs, maintenance, or cleaning on a plan-owned rental property
- Completing hands-on rehab or renovation work on a plan-owned property
- Using personal tools, equipment, or supplies to benefit plan-owned property
The rule extends to other disqualified persons as well. Your spouse cannot repair an IRA-owned rental. Your adult child cannot manage the property. Any service provided by a disqualified person triggers the same prohibition.
What you are allowed to do
Not all involvement with a plan-owned asset is prohibited. You may perform managerial and administrative functions as the account holder.
Permitted activities include:
- Signing checks and authorizing payments from plan accounts
- Reviewing and approving invoices from third-party vendors
- Selecting and hiring qualified independent contractors to perform work
- Making investment decisions about the asset
The distinction is between directing the plan and serving the plan. You can decide what happens; you cannot personally do the work.
Frequently Asked Questions
Can I act as a licensed contractor on a plan-owned property if I don't charge the plan?
No. The absence of compensation does not eliminate the prohibited transaction. Providing services to a plan-owned asset is prohibited under IRC Section 4975(c)(1)(C) regardless of whether you are paid.
Can my sibling perform repairs on my IRA-owned property?
Yes. Siblings are not disqualified persons under IRC Section 4975(e)(2), so a sibling may perform services for fair market compensation. All terms should be documented at arm's length.