The IRS goes to great lengths to outline the prohibited transactions of your IRA. Prohibited transactions may involve disqualified persons. Engaging in prohibited transactions within your IRA can lead to penalties, taxation, and the potential loss of your account’s tax-sheltered status. Surprisingly, amidst these regulations, there’s a strategy that the IRS allows: partnering IRA funds with disqualified individuals for investment.
UNLEASHING THE POWER: PARTNERING IRA FUNDS WITH DISQUALIFIED INDIVIDUALS
Partnering IRA funds with other investors is a proactive approach individuals employ to amplify buying power while simultaneously mitigating liability. Collaborations involving self-directed IRAs and other investors distribute income and allocate expenses based on each partner’s ownership percentage.
Contrary to common belief, the IRS permits partnering funds with disqualified persons, a fact that often goes unnoticed due to misconceptions. IRS Pub 590B clearly delineates the regulations prohibiting IRAs from engaging in transactions with disqualified persons. You can do so as long as the investment is done concurrently.
INVESTING CONCURRENTLY
Because partnering funds can help your IRA invest in larger deals, partnering with disqualified individuals on new deals opens doors to potentially greater retirement savings. The added advantage lies in your ability to assess their stake in the venture, leveraging first-hand knowledge of their financial situation. This makes the partnership vetting process significantly easier compared to forging alliances with strangers.
Keep in mind your self-directed IRA is restricted from selling or buying property from disqualified persons. These persons include lineal descendants, ascendants, their spouses, and others specified in the IRS Code 4975.
Partnering with yourself or a spouse can violate self-dealing and co-mingling personal and IRA funds and can potentially be a prohibited transaction. If you have questions and wish to discuss, reach out to us at uDirect IRA Services, LLC.
PROHIBITED TRANSACTIONS
Generally, a prohibited transaction is any improper use of your traditional 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 a lineal descendant). The following are some examples of prohibited transactions with a traditional IRA:
Borrowing money from it.
Selling property to it.
Using it as security for a loan.
Buying property for personal use (present or future) with IRA funds.
IDENTIFYING DISQUALIFIED PERSONS
Disqualified persons encompass yourself and your spouse, as well as lineal ascendants (parents, grandparents, their spouses), and lineal descendants (children, grandchildren, and their spouses).
Again, the list of disqualified persons extends to any individual or entity associated with your self-directed IRA, including fiduciaries, managers, advisors, or service providers. Additionally, any corporation, partnership, trust, or estate in which disqualified persons hold a 50 percent or greater interest is prohibited from transacting with your IRA.
uDirect IRA Services, LLC is not a fiduciary and we do not offer investment advice. We help you to understand the rules for self-directing so you can build your financial future. For answers to your Self-Directed questions, reach out to us at uDirect IRA Services, LLC. You can reach us by email at info@uDirectIRA.com. To open an account, begin HERE.
