prohibited transaction rules Archives

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?

Question: Two years ago my spouse and I caused our IRAs to make self-directed investments into an LLC that purchased a rental home. Each IRA is a 50% member of the LLC. The property needs repairs that will cost more money than the LLC has available. Can we cause our IRAs to make additional capital contributions to the LLC to fund the repairs?

Answer: No. If either IRA were to make an additional capital contribution to the LLC, it would create a prohibited transaction under Internal Revenue Code Section 4975(c), which provides that a:

“prohibited transaction” means any direct or indirect— . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”

Because the two IRAs each own 50% of the LLC, the LLC is a disqualified person under Section 4975(e)(2)(G). This provision says that a disqualified person is an entity 50% or more of which is owned by a fiduciary. Each IRA custodian is a fiduciary with respect to its IRA account and because the custodian owns 50% of the LLC, the LLC […]

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?Richard Keyt2018-05-13T13:58:53-07:00

IRS Publication 590 on Prohibited Transactions

IRS Publication 590 is entitled “Individual Retirement Arrangements.” The following text is from page 43 of Publication 590:

What Acts Result in Penalties or Additional Taxes?

The tax advantages of using traditional lRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.

Investing in collectibles.
Making excess contributions.
Taking early distributions.
Allowing excess amounts to accumulate (failing to take required distributions).

There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.

This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you do not avoid those acts.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of […]

IRS Publication 590 on Prohibited TransactionsRichard Keyt2018-05-13T13:58:54-07:00

Caution: An IRA LLC Transaction that Indirectly Benefits the IRA Owner Is a Prohibited Transaction

If your IRA is a member of an IRA LLC, you must know and follow the prohibited transaction rules set forth in Internal Revenue Code Section 4975. Many prohibited transaction rules are obvious such as the IRA LLC cannot loan money to the IRA owner or buy, sell or lease property with the IRA owner.

The prohibited transaction rules also contain a general, but nebulous rule some times referred to as the “indirect benefits” rule. If the IRA LLC engages in a transaction that creates an “indirect benefit” for the IRA owner, it is also a prohibited transaction that will disqualify the IRA, cause the IRA to lose its tax-exempt status and result in a deemed distribution of the all the assets to the IRA owner as of the first day of the tax year in which the prohibited transaction occurred.

The indirect benefit rule is codified in Internal Revenue Code Section 4975(c)(1) (E), which states that a:

“prohibited transaction means any direct or indirect . . . act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests […]

Caution: An IRA LLC Transaction that Indirectly Benefits the IRA Owner Is a Prohibited TransactionRichard Keyt2018-05-13T13:58:54-07:00

What is the Plan Asset Rule?

All IRA owners who have made self-directed investments into an IRA LLC and anybody considering do so should read Jeff Nabers’ article called “What is the Plan Asset Rule?” This rule turns assets owned by an entity into assets that are deemed to be assets of the IRA with the consequence that any transaction between a disqualified person and the entity is a prohibited transaction.

“The plan asset rule, among other things, is used to determine whether or not a retirement plan is involved in a prohibited transaction.”

See my post called “Department of Labor Regulation 29 CFR 2510.3-101 – the Plan Asset Rules.”

What is the Plan Asset Rule?Richard Keyt2018-05-13T13:58:56-07:00

Department of Labor Advisory Opinion 2006-09A

[RK Summary: The Department of Labor ruled that an IRA owner could not cause the IRA to invest in promissory notes issued by an entity that was controlled by the IRA owner’s son in law because it would be a prohibited transaction under Internal Revenue Code Section 4975.]

The text of Department of Labor Advisory Opinion 2006-09A is below.

December 19, 2006
Edward A. Appelt
24 Winslow Drive
Pittsburg, PA 15229

Department of Labor Advisory Opinion 2006-09A
IRC Section 4975 (c)(1)(A) & (B)

Dear Mr. Appelt:

This is in response to your request for an advisory opinion under section 4975 of the Internal Revenue Code (Code). Specifically, you ask whether allowing the owner of an individual retirement account (IRA) to direct the IRA to invest in notes being offered by a corporation, in which a relative of the IRA owner is the majority owner and stockholder, would give rise to a prohibited transaction under Code section 4975.⁽¹⁾

You represent that as the owner of an IRA for which you have retained investment discretion, you would like to direct the investment of these IRA funds into notes (Notes) that are […]

Department of Labor Advisory Opinion 2006-09ARichard Keyt2019-03-17T14:14:14-07:00

Department of Labor Advisory Opinion 2006-01A

RK Summary: The Department of Labor ruled that an IRA owner could not cause the IRA to invest in a new limited liability company that would purchase real estate and lease it to an entity 68% of which is owned by the IRA owner because it would be a prohibited transaction under Internal Revenue Code Section 4975. The opinion contains a statement that IRA owners should always keep in mind before an IRA LLC makes an investment” “the Department considers “a fiduciary who makes or retains an investment in a corporation or partnership for the purpose of avoiding the application of the fiduciary responsibility provisions of the Act to be in contravention of the provisions of section 404(a) of the Act.”

The text of Department of Labor Advisory Opinion 2006-01A is below.

January 6, 2006
Debra C. Buchanan, Esq.
Guidant Legal Group, PLLC
225 Commerce Street, Suite 450
Tacoma, WA 98402

Department of Labor Advisory Opinion 2006-01A
ERISA Sec. 29 CFR 2509.75-2

Dear Ms. Buchanan,

This is in response to your request for an advisory opinion as to whether the following proposed transaction would be prohibited under section 4975 of […]

Department of Labor Advisory Opinion 2006-01ARichard Keyt2019-03-17T14:14:14-07:00

When Can an IRA Invest in a Business Partly Owned the IRA Owner the IRA Owner’s Family?

Texas attorney Noel C. Ice wrote a very detailed law review type article called “Under What Circumstances Can an IRA Invest in a Business Owned in Part by the IRA Owner and Members of The IRA Owner’s Family?” If you want to get into the nuts and bolts of the law, this article is for you. Here’s some text from the introduction:

“Can an IRA form or invest in a partnership (or other entity) in which the IRA and other disqualified persons have more than a 50% interest in capital or profits without violating the prohibited transaction rules? Maybe, if Swanson [1] is followed.”

“Can an IRA form or invest in a partnership (or other entity) in which the IRA and other disqualified persons have less than a 50% interest in capital or profits prior to formation, but who have more than a 50% interest in capital or profits after formation, without violating the prohibited transaction rules? Theoretically yes, according to PWBOpL 2000-10A and FSA 200128011.”

“Can an IRA form or invest in a partnership (or other entity) in which the IRA and other disqualified persons have less than a 50% interest in capital or profits without violating the prohibited […]

When Can an IRA Invest in a Business Partly Owned the IRA Owner the IRA Owner’s Family?Richard Keyt2018-09-28T09:54:59-07:00

Department of Labor Advisory Opinion 1993-33A

[RK Summary: The Department of Labor ruled that an IRA owner could not cause the IRA to purchase land at fair market value from a tax-exempt entity of which the IRA owner’s daughter and son-in-law were the officers and directors and then lease the land back to the entity at fair-market rent or below market rent, depending on the entity’s ability to pay because it would be a prohibited transaction with a disqualified person under Internal Revenue Code Section 4975.]

December 16, 1993

Mr. Roberto Faith
1101 S.W. 102 Court
Miami, Florida 33174

Department of Labor Advisory Opinion 2006-09A
IRC Section 4975 (c)(1)

Dear Mr. Faith:

Your letter to the Internal Revenue Service (the Service) has been forwarded to this Office for our consideration and response with respect to the first of the two rulings you requested. You request guidance concerning the application of the prohibited transaction provisions of the Internal Revenue Code (the Code) to a proposed purchase and lease-back of a tax-exempt school’s land and building by a self-directed Individual Retirement Account (the IRA). Specifically, you ask whether the purchase and lease-back of the school would result in a prohibited transaction under section 4975 of the […]

Department of Labor Advisory Opinion 1993-33ARichard Keyt2019-03-17T14:14:13-07:00