![]() ![]() ![]() In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website, dedicated to advancing knowledge in financial planning. Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth. Which means it’s crucial for IRA owners to take a careful look at how they’re using their IRA, especially for accounts that are not simply invested in “traditional” publicly traded securities… as even if a self-directed IRA provider affirms that it can hold a particular alternative investment, it’s still the legal responsibility of the IRA owner themselves to determine if it is permissible, and avoid triggering prohibited transactions! But with the rise of self-directed IRAs buying real estate over the past decade, and more generally the popularity of using self-directed IRAs for “alternative” investments – which a recent GAO study estimates is now a $50B marketplace – there is a growing risk that the IRS will soon increase its enforcement on IRA prohibited transactions. Similarly, an IRA owner must be caution not to pay any non-IRA investment management fees, or financial planning fees, using IRA assets (as the IRA should only pay its own advisory fees).įortunately, in the past the IRS has been fairly lax in pursuing and attempting to enforce against IRA prohibited transactions. ![]() Which is why it’s a prohibited transaction for an IRA owner to “fix up” a piece of IRA-owned real estate, or allow a family member to live in (for rent payments, or rent-free) property owned by the IRA, and even a financial advisor who earns a commission from selling an investment into a family member’s IRA can trigger a prohibited transaction (although level advisory fees are permitted). Prohibited transactions themselves can include everything from buying or selling property between the IRA and a disqualified person, making the IRA assets available for a disqualified person’s use, or using IRA funds to compensate a disqualified person. The prohibited transaction rules cause adverse tax consequences for the IRA if it engages in such prohibited transactions with any “disqualified person”, which includes the IRA owner themselves and his/her immediate family members (as well as certain related trusts and business entities). But to curtail potential tax abuse, the Internal Revenue Code also limits the range of permissible investments in an IRA, and explicitly bans life insurance contracts and collectibles (and under separate rules, S corporations cannot be owned in an IRA, either).įurthermore, because an IRA is intended to be treated as a separate tax-preferenced retirement account from the other assets of the IRA owner, the Internal Revenue Code also contains a series of “prohibited transaction” rules intended to prevent the IRA owner from using the account to enrich themselves or their family members (without actually taking a taxable withdrawal). ![]() To fulfill their intended purpose in supporting saving for retirement, Congress grants the Individual Retirement Account (IRA) certain tax preferences, from tax-deductible contributions (in the case of traditional IRAs) to tax-free growth (for a Roth IRA). ![]()
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