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14 February 2017

IRA Loans for Business: Too Good to Be True

IRA Loans for Business: Too Good to Be True

e IRS is proving that, once again, just because it’s possible to borrow money from a retirement account to fund a business, you shouldn’t do so without sound advice. A March 29, 2016, U.S. Tax Court decision has brought this issue back to light and it serves as a reminder to handle self-directed IRA investments very carefully.

In the end, the couple was fined $180,000 for investing about $425,000 from a self-directed IRA into a new C corporation. The transaction was deemed prohibited because non-retirement funds were also put into the deal (about $60,000 in personal savings) along with a $200,000 promissory note. What was the problem? The couple exercised what the Tax Court calls “discretionary control” over their IRA money. Instead of treating it as a hands-off investment—as it’s meant to be—the couple used it to acquire assets for the business, and not as a passive stock investment. Including a promissory note connected to the use of IRA funds is also a prohibited transaction because it allows indirect extensions of credit to the IRA. 

The decision should serve as a cautionary tale for those using self-directed IRA accounts, including such accounts that hold real estate, closely held business entities, private loans and other alternative investments. “Checkbook IRAs” have become popular over the past few years, making it even easier (and more tempting) to move IRA assets around.

The shocking fact is that, according to the Journal of Accountancy, less than half of investors with self-directed IRAs handle legal and tax issues correctly. At the same time, mistakes in this area can be devastating. For more information, feel free to contact us.

Image Copyright: robeo / 123RF Stock Photo

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