Prohibited Transaction Case Law Summary: 2013-Present

The Internal Revenue Code does not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.

The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975.

Below is a summary of the most significant prohibited transaction cases since 2013.

ELLIS v. COMM., Cite as 115 AFTR 2d 2015-2072 (787 F.3d 1213), Code Sec(s) 4975; 408; 72; 61; 72; 7491, (CA8), 06/05/2015

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The Tax Court held that Mr. Ellis/general manager of a used car business/LLC, which was held 98% by IRA engaged in prohibited transaction under IRC Section 4975 when he caused the corporation to pay him compensation. The Court held that Mr. Ellis, as IRA's fiduciary and beneficial shareholder, engaged in an indirect transfer of IRA's income and assets for his own benefit in violation of IRC Section 4975(c)(1)(D) and indirectly dealt with such income and assets for his own interest or his own account in violation of IRC Section 4975(c)(1)(E).

On May 25, 2005, an attorney for Mr. Ellis formed CST Investments, LLC (CST), to engage in the business of used automobile sales in Harrisonville, Missouri. The operating agreement for CST listed two members: (1) a Self-Directed IRA belonging to Mr. Ellis, and (2) Richard Brown, an unrelated person who worked fulltime for CST. By the end of 2005, the IRA had a fair market value of $321,253, consisting of its membership interest in CST and $1,773 in cash. To compensate him for his services as general manager, CST paid Mr. Ellis a salary of $9,754 in 2005 and $29,263 in 2006. The wages were drawn from CST's corporate checking account and were reported as income on the Ellises' joint tax returns for both years.

The Ellises argued that the tax court erred in upholding the Commissioner's determination that Mr. Ellis engaged in a prohibited transaction by causing CST to pay him wages in 2005. The Court agreed with the Tax Court which held that Mr. Ellis engaged in a prohibited transaction by directing CST to pay him a salary in 2005. The record establishes that Mr. Ellis caused his IRA to invest a substantial majority of its value in CST with the understanding that he would receive compensation for his services as general manager. By directing CST to pay him wages from funds that the company received almost exclusively from his IRA, Mr. Ellis engaged in the indirect transfer of the income and assets of the IRA for his own benefit and indirectly dealt with such income and assets for his own interest or his own account (IRC Section 4975(c)(1)(D) & (E).

What Can We Lean From The Case?

The Ellis case is important for two main reasons. Firstly, it is the first case that directly reinforces the legality of using a newly established LLC to make IRA investments without triggering an IRS prohibited transaction. Secondly, it demonstrates the importance of working with tax professionals who have specific expertise working with the very complex IRS rules concerning the use of retirement funds to make investments. Accordingly, if Mr. Ellis used a 401(k) plan instead of an IRA to buy C Corporation stock, he could have availed himself of an exception to the prohibited transaction rules under IRC 4975(d)(13) for the purchase of qualifying employer securities, also known as a Rollover Business Start-Up (ROBS) solution.

Lawrence F. Peek, et ux., et al. v. Commissioner, 140 TC 216 (5/9/2013)

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The Court held that Mr. Peek, his attorney, and business colleague's personal guaranties of a loan/note from their newly-formed corporation stock of which was owned by taxpayers' Self-Directed IRAs, to third party incident to asset purchase transaction was an IRC Section 4975 prohibited transaction. The Court held that the fact that loan guaranties didn't involve IRAs directly was irrelevant since IRC Section 4975 was broadly worded to include both direct and indirect loans and guaranties to IRAs, by way of entity that IRAs owned.

In 2001, two taxpayers, Mr. Lawrence Peek and Darrel Fleck sought to use Self-Directed IRAs to acquire a business. The taxpayers established Self-Directed IRAs using 401(k) rollovers, created a new company (FP Company), and then directed the IRAs to purchase the common stock of FP Company with the cash in the IRAs. FP Company then sought to purchase the business. To consummate the purchase, in addition to the cash and other credit lines, FP Company provided a promissory note to the sellers. This promissory note was backed by the personal guarantee of the taxpayers, and the guarantees were then backed by the deeds to the taxpayers’ homes. In 2003 and 2004, the taxpayers converted their traditional IRAs to Roth IRAs. In 2006 and 2007, the IRAs sold FP Company for a gain. Because a Roth IRA recognized the gain, there would be no tax on the gain from the sale of stock.

The IRS audited the income tax return for both Mr. Peek and Mr. Fleck for the tax years of 2006 and 2007. After reviewing the individuals’ tax returns, the IRS adjusted their tax returns to include the capital gains income from the sale of the stock as well as imposed excise tax for excess IRA contributions. Both Mr. Peek and Fleck contested the IRS’s adjustment and filed a petition with the Tax Court.

The IRS argued that Mr. Fleck’s and Mr. Peek’s personal guarantee of a $200,000 promissory note from FP Company to the sellers of the business in 2001 as part of FP Company’s purchase of the business assets were prohibited transactions. Tax Court agreed with the IRS and found that the taxpayers had committed prohibited transactions, that the IRAs had ceased to be IRAs as of the beginning of 2001, and that the capital gain from the sale of FP Company by the IRAs was immediately taxed to the taxpayers. The Tax Court agreed with the IRS and held that since Internal Revenue Code Section 4975 prohibits both “direct and indirect . . . lending of money or extensions of credit” between an IRA and its owner, it did not matter that the loan guarantee by the taxpayers was to FP Company and not the IRAs directly. Internal Revenue Code Section 4975 clears prohibits the lending of money or extension of credit between a retirement plan and a disqualified person.

Mr. Peek and Mr. Fleck argued that the IRS’s notice issued in 2006 and 2007 were too late because the loan was made in 2001. The IRS contended and the Tax Court agreed that since the nonrecourse loan was ongoing, the prohibited transaction continued and on January 1, 2006 it remained true that both Mr. Peek and Mr. Fleck personally guaranteed the company loan.

Penalties

The Tax Court held that the Peeks and the Flecks were liable for a 20% accuracy-related penalty because their underpayments of tax were “substantial understatement of income tax” under Internal Revenue Code Section 6662.

While the penalty for an IRC 4975 violation is normally an excise tax, a prohibited transaction between an IRA and its owner results in the tax disqualification of the IRA under IRC Section 408(e)(2), in which case the IRA assets are treated for tax purposes as distributed to the IRA owner.

What Can We Lean From The Case?

The Peek case reinforced the legality that an IRA holder can use retirement funds to invest in a wholly owned entity which is controlled by him or her without triggering the IRA prohibited transaction rules. Peek also adds to the limited guidance on the situations in which “indirect” transactions fall within Internal Revenue Code Section 4975. In addition, the case highlighted the importance of working with independent tax attorneys who can properly advise on a proposed investment. Mr. Peek and Mr. Fleck relied on the advice of Mr. Blees, a CPA, who was also the promoter of the transaction. As a result, Mr. Blees did not warn Mr. Peek and Mr. Fleck about personally guaranteeing the business loan for their IRA investment.

IN RE: KELLERMAN, Cite as 115 AFTR 2d 2015-1944 (531 B.R. 219), Code Sec(s) 408; 4975, (Bktcy Ct AR), 05/26/2015

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The Kellerman case involved a construction company owner and wife/LLC co-owners (the Kellermans) who were denied a claim for bankruptcy estate exemption for Mr. Kellerman’s Self-Directed IRA. The court concluded that Mr. Kellerman who, along with his wife, conceded that they, LLC and partnership formed by IRA and LLC were disqualified persons under IRC Section 4975(e)(2) and engaged in prohibited transactions by directing IRA to deliver property as noncash contribution to IRA and LLC and to make cash contribution to partnership to develop property.

The Kellermans filed their voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court. Prior to his bankruptcy case, Barry Kellerman created the IRA, which as of October 27, 2008, had a reported value of $252,112.67. The named administrator of the IRA is Entrust Mid South, LLC (“Entrust”). The IRA is Self-Directed by Barry Kellerman, who made all of the decisions pertinent to the issues raised in the objections. At the commencement of their case, the debtors valued the IRA at $180,000.00 and claimed the entire fund as exempt under the Bankruptcy Act.

The trustee in the bankruptcy case against the Kellermans object to the Kellermans’ claimed exemption in the IRA on the basis that it was no longer exempt from taxation under the Internal Revenue Code as of the commencement of the case and, accordingly, is not eligible for exemption. They allege that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons as defined by the Internal Revenue Code.

The alleged prohibited transactions involved the 2007 acquisition of approximately four acres of real property located near Maumelle, Arkansas. Panther Mountain Land Development, LLC (“Panther Mountain”) played a precipitating and integral role in the purchase. Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership whereby the IRA contributed property and Panther Mountain contributed property and cash.

The purchase of the four-acre tract also took place on August 8, 2007. Barry Kellerman made the decision to purchase the four acres. The purchase took place principally to complement and assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. While the four-acre tract could be independently developed, controlling it substantially assisted in the development of the other Panther Mountain properties. The IRA funded the entire purchase price.

Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009, shortly after the Kellermans commenced their bankruptcy proceeding on June 3, 2009.

The Kellermans conceded that they are “disqualified persons” pursuant to IRC Section 4975(e)(2). Specifically, Barry Kellerman is the beneficiary of the IRA and a fiduciary under IRC Section 4975(e)(2)(A) because he exercises “discretionary authority” and “discretionary control” over the IRA as the owner. Dana Kellerman qualifies as a “member of the family” pursuant to subsection 4975(e)(2)(F) as the wife of Barry Kellerman. Panther Mountain constitutes a “disqualified person” under subsection 4975(e)(2)(G) because Barry Kellerman asserts a 50 percent membership interest. Likewise, the Entrust Partnership is a disqualified person pursuant to subsection 4975(e)(2)(G). Based on the Kellermans' concessions and the court's findings on disqualified persons, all that remains is a determination of whether a prohibited transaction occurred that terminated the tax-exempt status of the IRA.

The court concluded that in 2007, Barry Kellerman engaged the IRA in transactions including: (1) the purchase of the real property with IRA funds and subsequent conveyance of the real property to the IRA and Panther Mountain (the “non-cash contribution” under the Partnership Agreement), and (2) the cash contribution of $40,523.93 made by the IRA to the Entrust Partnership (the “cash contribution” under the Partnership Agreement). Collectively, individually, and with some redundancy, both the non-cash contribution and the cash contribution constitute “prohibited transactions” with disqualified persons pursuant to IRC Sections 4975(c)(1)(B), (D), and (E), which renders the IRA non-exempt.

What Can We Lean From The Case?

The case is a clear example that using retirement and personal funds in the same transaction can potentially trigger a self-dealing prohibited transaction under IRC 4975(c)(1)(D). By entering into a transaction with IRA funds that in some way directly or indirectly involves a disqualified person, in this case Panther Mountain, the IRA owner then is saddled with the burden of proving the transaction does not violate any of the self-dealing or conflict of interest prohibited transaction rules under IRC Section 4975, a burden that as this case shows could be difficult to satisfy.

As the court stated,

“Further, and cumulatively, Barry Kellerman transferred or used “the income or assets of [the IRA]” for the benefit of each of the aforementioned disqualified persons and as a fiduciary dealt with “the income or assets of [the IRA] in his own interest or for his own account.” IRC Section 4975(c)(1)(D),(E). Barry Kellerman, as the owner and fiduciary of the IRA, (1) orchestrated the IRA's membership in the Entrust Partnership with Panther Mountain, (2) signed the Buy Direction Letter and the Sale Letter that facilitated the purchase of the four acres solely by the IRA but held with Panther Mountain as tenants in common, and (3) directed the payment of “Business Expense[s]” by the IRA to develop the four-acre tract. The real purpose for these transactions was to directly benefit Panther Mountain and the Kellermans in developing both the four acres and the contiguous properties owned by Panther Mountain. The Kellermans each own a 50 percent interest in Panther Mountain and stood to benefit substantially if the four-acre tract and the adjoining land were developed into a residential subdivision.

The Kellerman case is a great example why using retirement funds and personal assets in the same transaction is not advisable as it can potentially trigger the IRC Section 4975 prohibited transaction rules.

IN RE: CHERWENKA, Cite as 113 AFTR 2d 2014-2333 (508 B.R. 228), Code Sec(s) 408; 4975, (Bktcy Ct GA), 03/06/2014

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The Cherwenka case involved a Georgia statutory bankruptcy estate exemption for individual retirement account within meaning of IRC Section 408, which covered Self-Directed IRAs held by Michael Cherwenka who was in the business of "flipping" houses. Contrary to creditor claim that IRA lost it's IRC Section 408 qualification when taxpayer engaged in prohibited transactions under IRC Section 4975, by co-owning property with IRA, the Court held there was no evidence of any such prohibited ownership structure for stated property or that taxpayer impermissibly benefitted from apportioned purchase and resale of same.

Michael Cherwenka established a Self-Directed IRA with Pensco to buy real estate. After a property is purchased, the property is resold. Any and all profits from the sale of any Pensco IRA asset are realized exclusively by the Pensco IRA. Sometimes the properties would be renovated or improved before sale. Sometimes the properties would simply be held and sold at a later date, hopefully capitalizing on advantageous market conditions or market swings. It is unclear whether the decision to improve a property and to what extent the properties were improved was made by Cherwenka or a contractor he regularly engaged. Cherwenka was not compensated for any real property research he performed, nor was he compensated for any recommendations, management or consulting services he provided relating to how the Pensco IRA properties were improved before resale. Cherwenka explained his role in buying and selling of these properties as being limited to identifying the asset for purchase and later selling the asset. Cherwenka then engages his contractors to decide or oversee the scope of work with improved properties. Cherwenka testified that he “read and approved” the expense forms prior to Pensco paying funds to reimburse the submitted expenses. Contractors were paid by the job, which accounted for labor costs, but no management fee or additional cost was included in the expenses submitted to Pensco. Cherwenka stated he would inspect or confirm that work was completed through site visits or communication with his “team” before he would approve expenses to be paid by Pensco.

Of interest, Cherwenka stated that he has never jointly owned a property with Pensco. Yet, he also testified that the property was owned in part by Pensco and in part by him personally. Debtor recollected that he owned 55% of the property with the remaining 45% owned by the Pensco IRA.

In Cherwenka, the court considered whether a debtor could exempt a Self-Directed IRA utilized to invest in distressed real properties and have the IRA realize profit from the later sale of these properties. The court agreed that the debtor was a disqualified person under IRC Section 4975. It was argued that Cherwenka performed work on the properties by researching and identifying the subject properties, appointing and approving work on the properties, and overseeing payment from Pensco for such work and those acts constitute prohibited transactions under IRC Section 4975(c)(1)(C) as direct and indirect services by the IRA holder, a disqualified person. The court disagreed and held that the State’s position requires the Court to read out of the statute the word “transaction.” There is no evidence that Cherwenka engaged in any transaction. A transaction includes an exchange of goods or services and the evidentiary record does not include that Cherwenka received anything in exchange for his alleged services. In fact, Cherwenka testimony included that he received no money, discount, or other benefit for the identified activities he undertook with the Pensco IRA.

Although Cherwenka was a disqualified person based on his ownership of the IRA, the court found that the debtor's involvement in selecting property and participating in other actions taken by the IRA did not constitute a prohibited transaction because the evidence failed to demonstrate that the IRA-owned properties resulted in any benefit to Cherwenka outside of the plan.

The court stated the following:

Self-Directed IRAs are authorized by federal law and are held by a trustee or custodian that permits investment in a broader set of assets than is permitted by traditional IRA custodians. Levine v. Entrust Grp., Inc. , 2012 WL 6087399 (N.D. Cal. Dec. 6, 2012). By its very nature, Debtor, as IRA owner, is required to make decisions regarding the Pensco IRA's assets and investments. Essentially, Debtor's decision-making regarding asset acquisition and sale is characterized by RESGA as a prohibited transaction under IRC 4975(c)(1)(C)—as a service between a plan (Pensco IRA) and a disqualified person (Cherwenka). However, the recognition of Self-Directed IRAs as qualified IRAs, necessarily implies that a disqualified person (the owner as fiduciary) will make investment decisions regarding the plan. RES-GA has failed to establish sufficient evidence that Debtor received any personal benefit besides asset appreciation of those properties held by the Pensco IRA. There is no evidence to support a determination that Debtor's selection of real estate and any other decisions or recommendations regarding the IRA-owned properties resulted in any benefit to Debtor outside of the plan. There is no basis to hold that Debtor's actions constituted a prohibited transaction, so there is no basis to disqualify the Pensco IRA.

The State’s next main argument was that the Pensco IRA is disqualified and not eligible for exemption because of a purported co-ownership of a prepetition property by Cherwenka (or a wholly-owned LLC) and the Pensco IRA. The State claims this co-ownership is also a prohibited transaction under IRC section 4975(c)(1)(D) and (E) because Cherwenka allegedly used IRA assets for his personal interest or benefit. The only evidence presented at the hearing regarding this alleged prohibited transaction is Cherwenka’s testimony that he held a 55% interest in the respective property and the IRA held the remaining 45%. No documentary evidence of the transaction or ownership structure was presented. The State asserted that this arrangement is a prohibited transaction because Cherwenka personally used or benefitted from the plan's interest in property. The Court felt that this position was unsupportive by the evidence, and the State failed to meet its evidentiary burden of establishing that Cherwenka was not entitled to exempt the Pensco IRA under Georgia Code section 44-13-100(a)(2.1)(D).

What Can We Lean From The Case?

The Cherwenka case is an important case in the Self-Directed IRA real estate context because it appears to hold that engaging in passive activities related to the purchase and sale of real estate assets would not rise to the level of a transaction involving goods and services pursuant to IRC 4975 and, thus, trigger the prohibited transaction rules. In this case, Cherwenka would locate the real estate to serve as the investment for the Self-Directed Pensco IRA. A real estate agent would then work with him to submit a proposed offer to Pensco. Cherwenka would then review the closing statements and communicates with Pensco in instances where there are discrepancies in fees or other figures on the HUD-1 or related documents. Cherwenka was not compensated for any real property research he performed, nor was he compensated for any recommendations, management or consulting services he provided relating to how the Pensco IRA properties were improved before resale. Cherwenka explained his role in buying and selling of these properties as being limited to identifying the asset for purchase and later selling the asset. Cherwenka engaged contractors to decide or oversee the scope of work with improved properties. Cherwenka testified that he “read and approved” the expense forms prior to Pensco paying funds to reimburse the submitted expenses. Contractors were paid by the job, which accounted for labor costs, but no management fee or additional cost was included in the expenses submitted to Pensco. Cherwenka stated he would inspect or confirm that work was completed through site visits or communication with his “team” before he would approve expenses to be paid by Pensco. In essence, the case gives real estate investors a good road map or guide as to the type of activities that would likely not be considered transactions or services under the prohibited transaction rules pursuant to IRC Section 4975. Because most real estate investors tend to perform the same sort of tasks that Cherwenka performed, the case offers a legal foundation for the position that passive real estate activities performed by the IRA holder in context of a Self-Directed IRA real estate transaction would not be considered a prohibited transaction. Moreover, the fact that Cherwenka used his IRA and personal funds in the same transaction could have changed the Court’s ruling in the case that Cherwenka engaged in a prohibited transaction, however, the State, for some reason, was not able to prove the co-ownership. Like the Kellerman case showed (KELLERMAN, Cite as 115 AFTR 2d 2015-1944 (531 B.R. 219), Code Sec(s) 408; 4975, (Bktcy Ct AR), 05/26/2015), using retirement and personal funds in the same transaction is not advisable and could trigger a prohibited transaction under IRC 4975.

James E. Thiessen, et ux. v. Commissioner, 146 T.C. No. 7, Code Sec(s) 4975; 408; 72

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The case involved married taxpayers, who rolled over prior retirement plan funds to Self-Directed IRAs, then caused the IRAs to purchase stock of newly-formed C Corporation, which in turn purchased assets of another business in a transaction involving a loan from the seller on which taxpayers made personal guaranties. The Court relied heavily on the ruling in Peek v. Commissioner, 140 T.C. 216, which involved similar facts and also held that the purchase of corporate stock by the IRA and the use of the IRA funds by the corporation to invest and operate a business actively involving a disqualified person, as well as involving personal guarantees, was a prohibited transaction. The Court held that the IRAs ceased to qualify on account of same, taxpayers were deemed to have received distributions as of 1st day of tax year.

What Can We Lean From The Case?

Like the Peek case, this case shows that using an IRA to buy a business through a C Corporation in which a disqualified person will be actively involved in, including the use of personal guarantees, would trigger a prohibited transaction under IRC Section 4975. Unlike a Rollover Business Start-Up (“ROBS”) solution, which involved the use of a 401(K) plan to purchase C Corporation stock ("qualifying employer securities"), which takes advantage of an exception to the prohibited transaction rules under IRC Section 4975(d)(13). Using IRA funds does not allow one to avail themselves of this exception.

Guy M. Dabney, et ux. v. Commissioner, TC Memo 2014-108 In 2008

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Mr. Dabney rolled over funds from an individual retirement account (IRA) at Northwest Mutual into a preexisting Self-Directed IRA he had with Charles Schwab & Co., Inc. (Charles Schwab). Sometime thereafter he learned of a piece of undeveloped land in Brian Head, Utah (Brian Head property), that was for sale, and which he believed was priced below its fair market value.

Mr. Dabney conducted some Internet research and came to the conclusion that IRAs are permitted to hold real property for investment. He then set out to have his Charles Schwab IRA purchase the Brian Head property. Mr. Dabney also contacted his CPA. The Schwab customer service line told Mr. Dabney that he would not be able to make the real estate investment with his IRA at Charles Schwab as they did not permit such investments with IRA funds. On the basis of his telephone conversations with the Charles Schwab customer service representative and his CPA, as well as his own research, Mr. Dabney arranged what he believed to be a viable way to have his Charles Schwab IRA purchase the Brian Head property, even though Charles Schwab did not allow alternative investments. His plan was to have funds wired directly from the IRA to the seller of the Brian Head property and to have title to the property placed in the name of “Guy M. Dabney Charles Schwab & Co. Inc. Cust. IRA Contributory”. He planned to then resell the property for a small gain and to contribute the proceeds of the sale back into the IRA. Mr. Dabney believed that the property would not need to be managed by a trustee as long as he did not use or enjoy the property. Although he had hoped to sell the Brian Head property sooner, Mr. Dabney was unable to find a buyer until 2011. It was then that Mr. Dabney discovered that the property was incorrectly titled in his own name. Upon discovering the bookkeeping error, Mr. Dabney promptly sought and received a scrivener's affidavit from Chicago Title in which the company admitted fault for the error. Mr. Dabney sold the Brian's Head property and received $127,226 on the sale, after taxes and fees. That amount was wired directly into the Charles Schwab IRA on or around January 28, 2011.

Mr. Dabney’s CPA prepared his Form 1040, U.S. Individual Income Tax Return, for 2009. Charles Schwab issued Mr. Dabney a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2009, although Mr. Dabney does not recall ever receiving it. The Form 1099-R stated that he had received a $114,000 early distribution from his Charles Schwab IRA and that no exceptions to the early distribution penalty applied. Mr. Dabney did not report the withdrawal on their Form 1040.

The Court confirmed that an IRA is allowed to hold real estate, but that the IRC does not require an IRA trustee or custodian to give the owner of a Self-Directed IRA the option to invest IRA funds in any asset that is not prohibited by statute, such as real estate. The Court further held that the withdrawal of the IRA funds from Schwab was not considered a tax-free direct rollover.

What Can We Lean From The Case?

The Dabney case is a perfect example of why you want to use a special Self-Directed IRA custodian, such as IRA Financial Trust Company, when making alternative asset investments with an IRA. The traditional financial institutions and banks (IRA custodians), such as Charles Schwab, Vanguard, Fidelity, Bank of America, etc., don’t make money when you invest your IRA funds in alternative asset investments, such as real estate, and as a result, will not permit you to do so. The Court was clear in stating that an IRA custodian is not required to provide its IRA clients with the ability to invest in all IRS permitted investment options, which is the main reason why there are custodians, such as IRA Financial Trust Company that exist in the marketplace. The case is a good example of what could happen if one attempts to make a Self-Directed IRA investment without using a Self-Directed IRA custodian that specifically allows for the intended IRA investment.

For more information on the Self-Directed IRA prohibited transaction rules, please contact a Self-Directed IRA specialist at 800-472-0646.

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