Boy do I get a lot of blowback every time I share my findings about why the government has declared ROBS illegal!
Why is there not a specific government ruling on ROBS?
It’s because once an issue has been ruled on, they don’t repeatedly consider it. “They” are the Department of Labor, and the first step of learning about Self-Directed IRA and 401(k) rules is finding out that “prohibited transactions” are an issue outside the jurisdiction of the IRS and in the hands of the Department of Labor (DOL).
When ROBS Was Ruled On
It was 2006. Debra Buchanan, the creator of the IRA LLC, asked the DOL a question about structuring an investment deal to avoid “prohibited transaction” status. (This was before she split with Guidant and became my legal counsel, but that’s another story.)
The DOL came back and said (paraphrased)
It doesn’t matter how you structure things or pursue exemptions. We’ve been clear throughout various rulings ["Advisory Opinions"] that a specific part of the law books [IRC 4975(c)(1)(D)] makes it prohibited for IRA or 401(k) funds to be used to benefit their account owner or family, unless it’s a taxable distribution.
That’s translated into humanspeak. You can see the actual ruling here. Untranslated legal language in it says:
…Department opinions interpreting [regulations] have made clear that a prohibited transaction occurs when a plan invests in a corporation as part of an arrangement or understanding under which it is expected that the corporation will engage in a transaction with a party in interest (or disqualified person).
The ROBS Coffin Is Sealed
This issue is so straightforward because DOL ruled on it as a bigger issue. DOL has received countless letters that ask “But what if I structure my Corporation this way or that way… do I then successfully evade the rules and regulations?”
And they always respond, “No. Using Self-Directed IRA or 401(k) funds to benefit the account owner or their family is always prohibited unless it’s through a taxable distribution.”
Tip: Don’t Piss Off The Government
I know that’s kind of common knowledge, but I wonder if you notice from the DOL language—”Department opinions interpreting [regulations] have made it clear”—that they are already (in 2006) annoyed at all the clever attempts at evading the rules and regulations.
Not a whole lot of wiggle room here. Zero, to be exact.
I know, I know… it’s bitter medicine. Especially if you dreamed up an awesome future all provided to you by ROBS.
But it’s quite easy to swallow if you get real and refocus your attention on legal strategies that actually work.