PROHIBITED TRANSACTIONS
What is the purpose of a retirement account?
The primary purpose of investing through a retirement account is to benefit the account itself and its future distributions during retirement. Specifically:
- Investments made within a retirement account grow TAX-FREE (Roth) or TAX DEFERRED (Traditional) to fund retirement.
- The account holder or beneficiary typically cannot personally benefit from the assets held within the retirement account until they qualify for distribution according to IRS rules (usually after reaching a certain age or under specific circumstances).
- Any distributions or benefits received outside of these qualified criteria may incur taxes and penalties.
- A disqualified person is prohibited from using assets held within a retirement fund for personal purposes in any manner.
What is a Disqualified Person
- A Fiduciary (the IRA holder, participant, or person having authority over making IRA investments).
- Someone who provides services to the plan (trustee or custodian).
- A lineal descendant of the IRA holder such as parents, grandparents, children, grandchildren, as well as spouses, trustees or custodians.
- Existing entities of which a disqualified person owns 50% or more.
It is important to note that brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “disqualified persons.”
Direct Prohibited Transactions
The SDIRA LLC Manager shall not allow the Company to engage in any type of “Direct Prohibited Transaction”. A “Direct Prohibited Transaction” generally involves one of the following:
- Sale, exchange, or leasing of property between an IRA and a “disqualified person”.
- Lending of money or other extension of credit between an IRA and a “disqualified person”.
- Furnishing of goods, services, or facilities between an IRA and a “disqualified person”.
- Transfer to a “disqualified person” of income or assets of an IRA.
Self-Dealing/Personal Benefit Prohibited Transactions. The Manager shall not allow the Company to engage in any type of “Self Dealing/Personal Benefit Prohibited Transaction”. A “Self Dealing/Personal Benefit Prohibited Transaction” generally involves one of the following:
- Direct or indirect use of Plan income or assets for the benefit of a “Disqualified Person”.
- An act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the Plan in his/her own interest or for his/her own account; or
- Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the Plan in connection with a transaction involving income or assets of the Plan.
- Conflict of Interest Prohibited Transactions. The Manager shall not allow the Company to engage in any type of “Conflict of Interest Prohibited Transaction”. A “Conflict of Interest Prohibited Transaction” could arise if a disqualified person interest or involvement in a transaction affects his/her independent judgment.
Section 408 Prohibited Transactions
General. Under Code Section 408, the Company shall not engage in:
- Investing in life insurance contracts as defined in Code Section 408(a)(3).
- Pledging an IRA or any IRA asset as a security for a loan, or (iii) investing in collectibles pursuant to Section 408(m). Notwithstanding the above, Code Section 4975(d) sets forth certain transactions that are exempt from being treated as “prohibited transactions” which the Company shall be permitted to engage in.
Precious Metals. The Manager agrees that the Company shall not be permitted to invest in any collectibles pursuant to Section 408(m). However, the following are not considered collectibles for this purpose:
- One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure) and be legal tender coins.
- One ounce silver coins minted by the Treasury Department.
- Any coin issued under the laws of any state.
- A platinum coin described in 31 USCS 5112(k) ; and
- Gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a)
Mitigate Potential Risks of Prohibited Transactions
You have various options for funding real estate beyond a direct full purchase from your account. We can help your structure investments such as:
- Undivided Interest: Collaborate with other investors to acquire a property. Each investor owns a share proportionate to their contribution. Your IRA earns profits in proportion to its ownership.
- Partnership: Combine your IRA funds with other sources, such as other retirement accounts or personal funds, for real estate investments. Explore different partnership structures for flexibility.
- IRA Financing: Purchase real estate using debt financing within your IRA, specifically through non-recourse loans. This method allows leveraging while adhering to IRA regulations and avoiding UBIT and UDFI taxes.
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We provide regular updates on important SDIRA changes and provide expert guidance on structuring transactions to minimize the risk of prohibited transactions.
Disclaimer: The information provided herein is for educational and informational purposes and shall not be construed as financial advice.
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