In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses a provision in SECURE Act 2 that discusses prohibited transactions and how they affect you if you have multiple IRAs.
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IRA Financial Group was founded by Adam Bergman, a former tax and ERISA attorney who worked at some of the largest law firms. During his years of practice, he noticed that many of his clients were not even aware that they can use an IRA or 401(k) plan to make alternative asset investments, such as real estate. He created IRA Financial to help educate retirement account holders about the benefits of self-directed retirement plan solutions.

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New IRS Rule for Self-Directed IRA Prohibited Transactions

The Internal Revenue Service (IRS) recently introduced a new rule that affects individuals who hold self-directed Individual Retirement Accounts (IRAs). These accounts allow account holders to invest in a wide range of assets, including real estate, private businesses, and precious metals, among others. However, the new rule focuses on controlling prohibited transactions within self-directed IRAs to ensure compliance with tax regulations.

Self-directed IRAs have gained popularity in recent years due to their flexibility and potential for higher returns. This type of retirement account allows individuals to have more control over their investments and diversify their portfolio beyond traditional assets such as stocks and bonds. However, this freedom also opens the door to potential abuse and tax evasion if not properly monitored.

Under the new IRS rule, account holders are prohibited from engaging in certain transactions with their self-directed IRAs. These transactions are deemed “prohibited” because they could potentially be used to benefit the account holder directly or to benefit someone in their “disqualified persons” category. Disqualified persons include the account holder’s spouse, children, grandchildren, business partners, or anyone providing services to the IRA.

Examples of prohibited transactions include:

1. Personal Use: Using self-directed IRA funds to purchase a vacation home or to pay for personal expenses, such as medical bills or college tuition.

2. Self-Dealing: Buying or selling assets to or from disqualified persons, such as selling real estate to your brother or purchasing inventory from your own business using IRA funds.

3. Direct or Indirect Compensation: Receiving compensation for providing services to the IRA, such as charging a management fee for overseeing the investments.

4. Loaning or Borrowing: Lending money from the IRA to yourself or disqualified persons, or using IRA funds as loan collateral.

These new rules aim to prevent individuals from using self-directed IRAs as tax shelters or vehicles for personal gain. Violating the prohibited transaction rules can result in severe consequences, such as the disqualification of the entire IRA account and potential tax penalties.

To ensure compliance with the new IRS rule, self-directed IRA account holders should carefully review their investment activities and seek professional advice if necessary. It is crucial to understand the nuances of these rules and to avoid any potential conflicts of interest that may trigger prohibited transactions.

In addition, self-directed IRA custodians and administrators play a vital role in assisting account holders to navigate the complexities of these rules. They can provide guidance, documentation, and oversight to ensure that investments made through self-directed IRAs adhere to the new regulations.

While the new IRS rule aims to protect the integrity of self-directed IRAs and maintain compliance with tax laws, it should not deter individuals from utilizing the potential benefits of these accounts. With proper education, due diligence, and adherence to the regulations, self-directed IRAs can continue to be a valuable tool for retirement planning and financial growth.

In sum, the recent IRS rule on prohibited transactions within self-directed IRAs emphasizes the importance of responsible and compliant investment practices. It aims to protect both the account holder and the integrity of the tax system. By understanding the rules, seeking professional advice, and working closely with custodians and administrators, individuals can continue to maximize the potential of their self-directed IRAs while staying within the boundaries of the law.