Here are some general questions, rules, and regulations to follow and some ways to plan and protect your investments.
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The IRS has an important message for tax payers with IRAs. IRS Publication 3125
The IRS defines a prohibited transaction as follows:
“Generally a prohibited transaction is any improper use of your 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 lineal descendant).”- Source IRS Publication 590-A and/or IRS Publication 590-B
Prohibited Asset Types, Disqualified Persons, and Prohibited Transactions:
A broad range of alternative investment options, which offer flexibility, are available to choose from for self-directed retirement accounts. There are rules that govern retirement accounts which self-directed investors must follow. The IRS rules which place some limitations on IRA investments relate to types of investments you can hold in a retirement account.
Prohibited Asset Types
IRS rules allow you to invest in any type of investment other than the following:
- Life insurance contracts
Collectables such as:
- Alcoholic beverages, artwork, or antiques
- Certain other tangible personal property considered to be collectible by the U.S. Treasury
- Coins (there are exceptions for certain U.S. Treasury minted coins)
- Metals (there are exceptions for certain types of bullion)
- Stock of Sub-Chapter S-Corporations
The purpose of your retirement plan is to benefit you when you retire and not before. This is the reason that certain transactions are not allowed – if they are interpreted as providing immediate financial gain or current personal benefit to the account holder or other disqualified persons.
Some prohibited transactions include:
- Sale or exchange, or leasing, of any property between a plan and a disqualified person
- Lending of money or other extension of credit between a plan and a disqualified person
- Furnishing of goods, services, or facilities between a plan and a disqualified person
- Income or assets of a plan being transferred to, used by, or used for the benefit of a disqualified person of the income or assets of a plan
- Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account
- Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan
- The IRA holder and his or her spouse
- The IRA holder’s lineal descendants (children, grandchildren, etc.) and their spouses
- The IRA holders lineal ascendants (parents, grandparents, etc.)
- Anyone providing services to the IRA
- Any corporation, partnership, trust, or estate in which a disqualified person(s) has a 50% or more combined ownership or is owned by multiple disqualified persons or disqualified entities
- Fiduciaries – the IRS defines a fiduciary as anyone who exercises any discretionary authority or control in the managing or administering of your retirement account, or in managing or disposing of its assets, or anyone who provides investment advice to your retirement account for a fee, or has the authority or responsibility to act in such a capacity
Internal Revenue Code Section 4975 restricts the types of investments and transactions that can be conducted inside a retirement account and governs the consequences if your retirement account conducts a prohibited transaction or owns a prohibited asset. For a full definition of prohibited transactions and disqualified persons under IRC 4975 click here: IRC 4975 – Prohibited Transactions and Disqualified Persons
The intent of your retirement plan is to benefit you when you retire and not before; therefore, transactions that the IRS interprets as providing current personal or benefit financial gain to you, your direct family, your business, or other disqualified persons are not allowed. Below are examples of self-dealing which would be considered prohibited transactions:
Your Retirement Account Cannot:
- Hold real estate that you or other disqualified persons live in or use in any way while the property is held in your retirement account.
- Purchase real estate owned by a family member of lineal descent (i.e. your father or mother).
- Real estate in your retirement account must be for investment purposes only.
Your retirement account typically should not purchase equity shares in a business/entity in which you (as the account owner) or a disqualified person or entity owns a majority share; or in which you or a disqualified person or entity holds a role of or similar to a managing member, has signing authority or check writing authority.
Your retirement account cannot loan money to yourself or other disqualified persons.
One or more transactions conducted leading up to making a prohibited transaction, such your IRA lending money to a non-disqualified person, who then lends money to their spouse, who then loans it to you personally. Whether done intentionally or accidentally, it is prohibited.
Consequences of Prohibited Transactions
There are possible severe consequences for you as the owner of the retirement account and for the other person(s) who participate in a prohibited transaction, including:
- The investment treated as a distribution, which may trigger a taxable event
- An early distribution penalty of 10% if you are under the age of 59½
- You may incur a 15% excise tax on the amount involved in the prohibited transaction
- You may be subject to additional penalties which can accrue for under-reporting for the years before the IRS discovers the prohibited transaction
The Internal Revenue Service requires that all IRA assets are held by a custodian and that the custodian accurately reports all IRA transactions on the account. Many traditional retirement plan custodians do not accept Self-Directed IRA accounts due to the many nuances and the varied types of investments they involve. iPlan understands these requirements and performs them all efficiently.
At iPlanGroup, we are dedicated to making Self-Directed IRA investment as easy and effortless as possible for you. We don’t tell you where to invest your money, but rather accurately facilitate your purchase of assets in a timely manner, and keep up-to-date records of all your transactions and IRA purchases. We offer the same investment options as other retirement plan administrators – we just offer the extra help to make it easier for you
Many investors are led to believe that the only types of investments allowed in their retirement plan are traditional stocks, bonds, and mutual funds. This is not the case with Self-Directed IRAs. Since their creation in 1975, they have given people the freedom to choose where their money is invested as well as a wide variety of alternative investment options. At iPlanGroup, we help facilitate your IRA investments to maximize your future wealth.
You are allowed to purchase real estate, notes, precious metals, private placements, accounts receivable, tax lien certificates, and so much more – basically, anything that is not prohibited as defined by the Internal Revenue Code.
Yes. The Employee Retirement Income Security Act (ERISA), established in 1974, moved the responsibility for retirement savings from the employer to the employee. They then created IRAs in 1975. This was to allow individuals the freedom to choose where their retirement funds were invested. The IRS code doesn’t explain which investments are permitted; instead, it outlines which investments are prohibited. There are only two types of investments excluded: life insurance contracts and collectibles (art, jewelry, china, etc.). Refer to Internal Revenue Code Section 401 (IRC § 408(a) (3)).
Any improper use of your IRA by you or a disqualified person (party related to your IRA) would be classed as a prohibited transaction. Internal Revenue Code Section 4975 states: An IRA cannot engage in any transaction (direct or indirect) with anybody or anything considered related to the IRA. Prohibited transactions, according to the tax code, are stated as life insurance contracts and collectibles, almost any other investment is allowed.
If an IRA account holder is flagged for participating in a prohibited transaction under Internal Revenue Code Section 4975 or 408 with their IRA funds, it will result in a “deemed distribution” of the IRA. This will incur a severe penalty and taxes to all of the IRA’s assets from the first day of the year in which the prohibited transaction took place. The deemed distribution will also be subject to ordinary income tax, and if you were under 59 ½ years old when the deemed distribution took place, a 10% excise tax on premature distribution may also be incurred. In addition, if the “prohibited transaction” is not corrected within the taxable period, Internal Revenue Code Section 4975(b) imposes a tax equal to 100 percent of the amount involved.
Self-Dealing is a term given to any transaction which can financially benefit you personally or any disqualified person, instead of your IRA. As your IRA is intended to benefit you in retirement, you cannot benefit from it financially today.
If you chose online statement options, you can view your account at any time. End-of-year statements are mailed. If you do not choose the online statement option, you will receive a statement every quarter.
After you have reached 70 ½ years old, required minimum distributions are the minimum amounts that must be distributed to you from your retirement account(s), with the exception of the Roth IRA.
Yes, there will be a small fee. The exact amount will depend on how you wish to receive the funds – a check fee is $5 and a wire fee is $30.
There are several methods available to you. Fees can be deducted from your iPlanGroup account if you have available funds, prior to a check being issued. Or you can make a credit card payment over the phone.
Federal taxes can be withheld at a minimum of 10% but state taxes can only be withheld if you live in the state of Arizona.
If your account is short on funds and unable to complete your distribution, you will be notified by us. You will need to deposit the sufficient amount of funds into your account to ensure you receive the distribution the following month.
You will need to submit a Payment Authorization Letter requesting the payment to your personal account, and also submitting an invoice, showing the expense you have paid.
The entire $100K will be transferred, but you will be responsible for paying the taxes on that amount.
You would need to complete an Expense Pay Form and an invoice for what you want paid. This then gives iPlanGroup the permission to pay your expenses.
Yes. It is possible to take possession of a physical asset, but it requires you provide iPlanGroup with some additional documents and information. We will require a Distribution Form, a Fair Market Valuation or appraisal from a third party. You will be required to re-register the asset and provide confirmation of same. And you will need to pay any outstanding administration fees or transaction fees.
Yes. You can make all these decisions and give us the details on a Payment Authorization Letter.
Yes. We will send you an email confirming that your request has been processed and when the funds will be sent or be available for pick up.
If you have insufficient funds in your account, we will contact you to inform you. Once you have added more funds to your account, your Expenses Pay Form will be processed within two working days.
Yes. We require a bill to ensure we have the correct information to fulfill your request efficiently.
No. Each separate IRA plan has a different account name; therefore, we would need two separate Expense Pay Forms with the relevant percentage on each before we can process them.
Referred to in two different forms: Unrelated Business Income Tax (UBIT) and Unrelated Debt Financed Income Tax (UDFI) apply to IRA funds which are invested in assets that do not require you to pay taxes (such as LLCs) and are an operating entity of a business. UDFI relates to an IRA that is debt financed and refers to the profits made from the sale of a debt-financed property. UBIT is generally reported on Schedule K-1 issued by the entity. If the UBIT attributable to your account exceeds $1,000.00 for any taxable year, IRS Form 990-T must be filed along with the appropriate amount of tax, payable from your IRA account. If the tax is applicable, you must prepare or have prepared IRS Form 990-T and forward it to iPlanGroup along with written authorization to pay the tax from your account. If you are required to file IRS Form 990-T, you must apply for and utilize an Employer Identification Number (“EIN”). You may not use iPlan’s EIN or your own Social Security Number. iPlan does not monitor UBIT and does not prepare IRS Form 990-T for you. For more information on UBIT, please refer to IRS Publication 598 and/or consult your tax advisor.
Yes. An IRA can be subject to legal action. Although some states do not permit creditors to collect from IRAs, this is not true of all states. Plus, IRAs are never exempt from Federal or State Tax Authorities.
It would be a prohibited transaction to co-invest your personal funds with funds of the plan.