Can my account invest in an entity that I or a family member owns or controls?

If your IRA or Qualified Retirement Plan loans funds to certain family members, such as lineal descendants and spouses of lineal descendants, or an entity that you or certain family members own or control, whether controlled individually or as an officer of a corporate general partner, managing member, etc., the transaction could possibly be a prohibited transaction under the Internal Revenue Code Section 4975. Our policy on this issue is that if you or another disqualified person is an officer or director of an entity, or an officer of a corporate general partner, managing member, etc., and you will collectively own less than 50% of the entity, then you will need to obtain a legal opinion from an ERISA or tax attorney addressed to you in which the transaction is discussed in detail prior to us processing your investment instructions. If you, any family member, or disqualified persons collectively will own 50% or more of the entity, we will not process the investment even if you are able to obtain a legal opinion.

If I hold property in my IRA, can I use it?

No. You or any disqualified person may not have any personal use or benefit of the property while it is held in your IRA account. The property is to be purchased for investment purposes only.

What are the Consequences of a Prohibited Transaction?

If an IRA holder is found to have engaged in a prohibited transaction under Internal Revenue Code Sections 4975 or 408 with IRA funds, it will result in a “deemed distribution” of the IRA. The taxes and penalties are severe and are applicable to all of the IRAs assets on the first day of the year in which the prohibited transaction occurred. If this deemed “distribution” occurs, it will be subject to ordinary income tax and, if you were under the age of 59 1/2 at that time, a ten (10%) percent excise tax on premature distributions may also be assessed. 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.

What is a Prohibited Transaction?

The Internal Revenue Code Section 4975 defines a prohibited transaction as any improper use of your retirement account. Additionally, a transaction between your IRA account and a disqualified person is a prohibited transaction. Disqualified Persons are defined to be the account owner, other fiduciaries, certain family members (lineal descendants and spouses of lineal descendants), and businesses under the account owners or disqualified person’s control. Please review the code for specific information and definitions. Other useful resources are the IRS Publications 560 and 590.

What is a disqualified person?

Generally, a “disqualified person” includes, but is not limited to:

  • Yourself
  • Your lineal ascendants and descendants
  • The spouse of a lineal descendant
  • Your spouse
  • Any entity that is owned 50% or more by disqualified persons
  • An entity that is controlled 50% or more by disqualified persons