Be Careful With Your Self Directed IRA Or Else

Self-directed IRA’S are commonly used vehicles for investing IRA funds into assets without having to immediately pay taxes on the funds used for investments. These IRA-owned LLC‘s operate out of a business checking account with the “Manager” of the LLC (also the IRA account holder) being the authorized signer on the account. If the account holder is not extremely careful, the self-directed IRA may create major tax and legal problems. Specifically, tax-exempt status may no longer be afforded to the IRA and the entire value of the IRA may be treated as taxable to the account holder, including possible interest and penalties.

Ensuring that the account holder does not engage in, what the IRS considers, “prohibited transactions” is key to avoiding these potential issues. Generally, the self directed IRA shall not interact, or transact matters, with “disqualified persons.” Disqualified persons include, but are not limited to, the IRA account holder; the account holder’s spouse; lineal descendants, lineal ascendants, and spouses of these persons; and, business entities owned 50% or more by these people. It is important to note that any direct or indirect interaction, and even minor transactions, between the IRA and a disqualified person may result in the complete taxation of the IRA.

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