American IRA Discusses How to Avoid Getting a Self-Directed IRA Disqualified by the IRS
Posted on November 30, 2018
A Self-Directed IRA is a great way to build wealth for retirement—provided that the IRS approves. A recent post at American IRA highlighted how investors can make sure their Self-Directed IRA qualifies.
A Self-Directed IRA can be a powerful tax tool—provided that it is approved by the IRS. But failure to comply with certain IRS rules can result in a Self-Directed IRA becoming disqualified, which in turn can trigger a series of “bad things” under IRC Section 4975, according to a recent post at the American IRA blog.
One of the most important things for investors to watch for, according to the post, is a prohibited transaction. In IRC Section 4975, a 15 percent tax can be levied on the amount involved in the prohibited transaction—on the prohibited person involved with this transaction. For instance, if someone were to sell a house from the Self-Directed IRA directly to a family member’s IRA, that family member would then see a potential tax bill of 15% of the transaction. That’s because certain family members would be “disqualified persons” related to an investor’s IRA.
Additionally, the IRS would then levy a 15% tax on the transaction on the selling party—which in this case would be the original selling Self-Directed IRA.
These penalties are heavy, but they are not the only penalties that those with a disqualified Self-Directed IRA could see as a result of doing bad business. That is why the article highlighted how important it is for investors to maintain best practices with their Self-Directed IRAs.
"People understand that a Self-Directed IRA gives them a lot of freedom,” said Jim Hitt, CEO of American IRA. “But that is not all it gives them. It also gives them a wide range of responsibilities. Self-Directed IRA administration firms like American IRA can help in making sure that people understand the paperwork involved. But we do not hold the power capable of stopping people from making bad decisions. That is why it is so important that investors understand what goes into a valid transaction under a Self-Directed IRA.”