The law is clear on Self-Directed IRA rules and to whom your Self-Directed IRA can do business with, right?
The usual documents list prohibited individuals as the IRA owner, the owner’s spouse, antecedents and decedents, anyone who is advising the owner on the IRA in a fiduciary capacity, and any entities controlled by any of the above prohibited counter-parties, right?
If true, that should mean you can use your IRA to buy and sell to or from, or rent to, or lend to, or borrow from your brother, sister, aunt, uncle or cousin, or your own business partner, right?
Not so fast.
Yes, the Self-Directed IRA rules in the law spell out these counter-parties listed above as prohibited individuals for IRA transactions, specifically. But there’s a bit more to it than that: The law not only prohibits IRA owners from conducting business directly with those prohibited individuals; it also prohibits self-dealing.
Well, what does that mean? It means that the list of people who would be possible problematic for your IRA to deal with is broader than a lot of people – even experts in the field – may realize.
Some regulations, including Treasury Regulation Reg. § 54.4975-6(a)(5), expand the list of problematic counter-parties to “family members and certain businesses in which the person is an owner, officer, director, etc.”
The bottom line is this: While your sister, brother-in-law or cousin may not be on the short list of prohibited counter-parties, we suggest it may not be a great idea to try to press the issue with the IRS. The government has enough daylight in the law and in supporting regulations to look very carefully at arrangements with anyone who might possibly represent a conflict of interest – and potentially disqualify the entire IRA as a result.
This would be a terrible tax consequence for the IRA owner, because if an IRA is disqualified by the IRS, it generates an immediate tax bill on every dollar of earnings or profits that has been tax deferred – and a possible early withdrawal penalty, to boot.
If you own a rental property within a self-directed real estate IRA, and the IRS gets wind that your IRA was renting the property to your brother, you could potentially face a lot of scrutiny. Was the rent at or above market rate? Were you using your IRA to provide special favors for your brother? Did you receive a personal kickback in return?
The IRS has a long record of going after taxpayers who violate not only the letter of tax laws, but also the Congressional intent. We suggest that before you go out and engage in business activities with your IRA that could trigger a red flag, that you first speak with a qualified tax expert, such as a tax attorney or CPA – preferably with experience specific to self-directed retirement accounts. This is important so the attorney or CPA is familiar with the most recent case law, private letter rulings, and regulatory changes in the field.
American IRA is a third-party custodian for self-directed IRAs, and as such we do not provide specific legal or tax advice in this regard. Our role is in the facilitation of the transactions you direct us to make.
However, if you are tempted to engage in transactions with people who are close to you in some way, we suggest thinking about it this way: If you were to hire an outside board of directors of totally disinterested experts to approve your IRA’s transactions, with the sole fiduciary responsibility of maximizing its value, would they approve the transaction?
Proceed on that basis.
If you want to know more, or have other questions, visit us on line at www.AmericanIRA.com, or call us at 866-7500-IRA (472).
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