We all have that friend who is financially irresponsible. You know, they have a new cell phone every time one comes out. They lease a brand new car every 2 years. Their credit cards are maxed out. And they don’t really have a game plan on how to pay for the stuff they have. The best I can tell is that our government is kind of like that. If you look at the timeline, all major tax changes result in increased taxation. Let’s just look at what happened with Social Security:
In 1935, the Social Security Act was passed, and the Social Security benefits systems was created. Benefits were not to be taxed.
In 1937, FICA began payroll taxes of 2% in order to fund the payout of SS benefits.
The most notable difference between endeavors down the path of using a self directed IRA versus traditional investing is the unique rules that apply to the former. The extremely simple rule is that an IRA (specifically) cannot buy life insurance or collectibles (such as rugs, works of art, alcohol, bullion).
The more involved rule is known as “no self dealing” and is described in Internal Revenue Code section 4975. This rule basically says that for each retirement plan/account, there is a list of “disqualified persons” with whom that plan cannot do business. These DQPs include:
The accountholder/participant and any other fiduciary (person who makes investment decisions for the plan)
Companies who provide services
A member of the family of #1 or #2 above (family defined as spouse [husband/wife], ancestor [parents, grandparents, etc], lineal descendants [children, grandchildren, etc], and spouses of lineal descents)
A corporation (or other entity) that is 50% or more owned (directly or indirectly) by #1, #2, or #3 above
An officer, director, 10% or more owner, or highly compensated employee of #4 above.
A 10% or more (in capital of profits) partner or joint venturer of #4 above
Every self directed IRA/401(k) investor should make this DQP list before making any investments.
Too many people seem to think of the list as only “the accountholder and his family”. As you can see it is a bit more involved than that. This doesn’t require calculus, but you should actually write out the list step by step to ensure that it is complete. This list can actually get quite extensive if you, your family member, or anyone who provides services to your plan has ownership in several companies.
So, what is a prohibited transaction?
In a nutshell, when a DQP transacts with a plan it is a prohibited transaction (abbr “PT”). The trick here is what is considered to be a “transaction”. This is generally defined in IRC 4975 as when one of the following happens between a plan and DQP directly or indirectly:
sale, exchange or lease of property
lending of money or extension of credit
furnishing of goods, services, or facilities
So I consider that to be the general rule. There are a couple of special rules and they [Read more…]
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