IRA Practices to Avoid

While it is impossible to list out all of the prohibited IRA practices to avoid, we feel it may be very helpful to you to discuss a few of the common mistakes we have seen IRA owners make that could result in significant income taxes and penalties that could have been avoided.

We sought the help of Jason Helquist, MA, LL.M, and Chief Compliance Officer of Provident Group, an individual who is proficient in the Self-Directed IRA field. According to Mr. Helquist:

The Following Situations Provide Some Examples Of Common Self-Directed IRA Mistakes IRA Owners Have Made:

1. IRA’s Purchase of a Personal Residence - The use of an IRA to purchase a house for the personal use by the IRA owner or another person disqualified as to the IRA is prohibited. Although the DOL has given numerous individual exemptions for transactions involving the sale of real estate between a plan and a party in interest, these typically require an independent fiduciary to approve of the transaction. A transfer of encumbered property by a disqualified person to an IRA is also considered a sale/exchange for purposes of the prohibited transaction rules. Thus, a sale of property subject to a mortgage or deed of trust, which the IRA assumes is prohibited.
2. Loans Between the IRA and a Disqualified Person - The IRA owner cannot borrow from the IRA. The IRA owner may lend IRA assets to a corporation or person who is not a disqualified person or a corporation or person in which the IRA owner does not have an interest. This would include all classes of loans, including traditional extensions of credit, seller financing arrangement, secured and unsecured lending.
3. Use of a House/Apartment that is Owned by the IRA - The use by an IRA owner or other disqualified person of a house, apartment, condo, recreational property, etc. would be a prohibited transaction because it would violate the basic rule that the IRA assets cannot inure to the personal benefit of the IRA owner or other disqualified person.
4. Owner’s Pledge or Assignment of the IRA Assets – Neither an IRA nor its assets may be assigned, pledged, or otherwise used as collateral by the IRA owner. Such assignment or pledge might not be deemed to be a disqualified transaction; however, it would be treated as a distribution with respect to the assets assigned or pledged.
5. IRA’s Purchase of Life Insurance - An IRA may not be invested in life insurance. Thus, a life insurance contract distribution from a qualified plan may not be rolled over into an IRA. In IRS’s private letter rulings, the IRS has prohibited the IRA trustee from using its corporate funds to purchase life insurance on behalf of taxpayers who have established an IRA with that trustee.
6. IRA’s Investment in an Affiliated Corporation/Partnership – Examples of this include the IRA owner either as a current owner, co-investor, employee, creditor, director or officer.