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Recent Case Shows Importance of Choosing the Right IRA Custodian

ira custodian for self-directed ira

The Self-Directed IRA gives investors more investment options, but there are a few investments types that the IRS prohibits. By working with the right IRA custodian, you will receive ongoing support so you avoid triggering a prohibited transaction.

Self-Directed Retirement Vehicle

Self-Directed retirement plans, such as the Self-Directed IRA, allow investors to use retirement funds to purchase non-traditional assets in a tax-advantaged manner. The Self-Directed IRA mirrors the Traditional IRA but allows investors to diversify their retirement portfolio and purchase hard assets that act as a hedge against inflation. Additionally, investors are more likely to generate higher income and gains on an investment they understand, such as real estate. Self-directed retirement plans are one of the best kept secrets among investors looking to use their retirement funds to make investments. Yet they act as a safe harbor for IRA/401(k) investors who do not feel confident investing in the stock market.

Yerian V Webber

A recent Forbes article highlighted the risks of establishing a Self-Directed IRA without the proper support from an IRA custodian.

The Forbes article highlights the case of Yerian v Webber.

Keith Yerian, a Self-Directed IRA owner, engaged in a number of self-dealing prohibited transactions, including:

  • Titling IRA-owned cars in his name and that of his wife.
  • Using IRA funds to purchase a condo in Puerto Rico, which he used for personal use.

This abuse of his IRA funds resulted in tax penalties that exceeded $100,000. According to Yerian, the assets within his Self-Directed IRA were exempt, and therefore, in accordance with the IRA’s governing document. Bankruptcy Trustee, Richard Webber, whose job it is to meticulously gather assets as evidence for the creditors, challenged Yerian’s claim of exemption. In the end, the Eleventh Circuit Court of Appeals took the side of the trustee:

“Yerian failed to maintain his IRA in accordance with its governing instruments, which explicitly prohibited the acts of self-dealing he engaged in with his IRA funds. As a consequence, he is not entitled to claim a creditor exemption for his IRA…”

Role of the Passive Custodian

The passive custodian (Self-Directed IRA custodian) simply administers the plan. By law, every qualified retirement plan must have either a custodian or trustee. An IRA custodian can be a bank, credit union or trust company, such as IRA Financial Trust. In the case of Keith Yerian, his IRA custodian is IRA Services Trust Company. Because the passive custodian offers no financial advice and has no fiduciary duty to its clients, one could argue that IRA Services could not have done anything differently. Here at IRA Financial, we see it differently.

The IRA Financial Difference

By working with a team that has the right expertise, they can help you make the right decisions to avoid triggering a prohibited transaction. At IRA Financial, we understand that the Self-Directed IRA custodian has no responsibility to provide consultation, but unlike other companies, we offer resources to keep our clients continuously educated. Furthermore, our relationship with Capital One Bank will allow us to open a bank account for our clients. As a result, we can monitor the type of investments they make from a prohibited transaction standpoint and provide assistance when necessary.

IRA Financial Resources

Founder and President of IRA Financial, Adam Bergman, is one of the leading voices in the self-directed retirement industry. He believes that the IRA custodian should take a different approach when dealing with their clients on IRS rules. He created a company that would help educate retirement account holders about the many benefits of self-directed retirement solutions. We have never had a client audited for a prohibited transaction, thanks to the expertise of our tax specialists and the ongoing support we provide to our clients.

Books 

President of IRA Financial, Adam Bergman, has written several books on self-directed retirement plans and investments, such as cryptocurrency. Many of his books, like Self-Directed IRA in a Nutshell, are a great starting point for investors who are interested in learning about the retirement structure from the ground up. The books will help you navigate the world of non-traditional investment options whether you are a novice investor or have been investing for years.

Podcasts

The IRA Financial podcast, Adam Talks, is available once a week, hosted by Adam Bergman. Each week, we address topics related to your self-directed retirement plan, such as current news on alternative investments, updated IRS regulations, legislations and more.

Webinars

You can catch the IRA Financial Webinars once a month, which are either provided exclusively to annual clients or to the general public. Our one-hour webinars discuss hot topics, such as the surge in the price of Bitcoin, transactions you can do with your retirement plan, and much more.

IRS Prohibited Transactions

There are only three categories of investments IRA account holders cannot do with a Self-Directed IRA.

  1. Collectibles
  2. Life Insurance
  3. Prohibited transactions outlined under IRC 4975 that involves a “disqualified person

The IRA custodian you choose should provide resources to better equip you on the IRS prohibited transaction rules.

Disqualified Person

A disqualified person includes the retirement account holder, and his/her lineal descendants, including entities controlled by such persons. A lineal descendent is a grandparent, parent, child, spouse, and daughter/son-in-law of the retirement account holder. Interestingly, siblings are not treated as “disqualified persons” under IRC 4975.

Furthermore, there are a number of self-dealing and conflict-of-interest type transactions involving a retirement account holder and a disqualified person that can trigger a prohibited transaction under IRC 4975. Your IRA custodian should ensure that you are aware of the rules set by the IRS.

In some cases, navigating the prohibited transaction rules can be complex and involve various levels of tax and case law interpretation. Therefore, the first important step an investor can take is to choose the right IRA custodian. If you trigger an IRS prohibited transaction, this will invalidate your IRA and bring about a tax and penalty.

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