The following is a list of sections from the Internal Revenue Code of 1986, as amended, that affect IRAs and IRA LLCs:
- Section 408(a)(3) – This is the section that prohibits IRAs from investing in life insurance contracts.
- Section 408(e)(2) – This section provides that an IRA that engages in a prohibited transaction will lose its tax-exempt status if it engages in a prohibited transaction. The consequences of a traditional IRA that loses its tax-exemption is that the fair market value of all of the IRA’s assets are included in the income of the IRA owner in the year of the prohibited transaction.
- Section 408(e)(4) – This section prohibits an IRA from pledging any of its assets as security for a loan.
- Section 408(m) – This is the section that prohibits an IRA from investing in collectibles.
- Section 4975 – This lengthy section contains the critically important prohibited transactions rules.
There are also important United States Treasury Regulations that state what happens if an IRA engages in a prohibited transaction, pledges IRA assets as security for a loan, and the prohibition on investing in life insurance contracts. These regulations are:
- Treasury Regulation Sections 1.408-1(c)(2), (3) and (4)
- Treasury Regulation Section 1.408-2(b)(3)