Beyond Prohibited Transactions: The Step Transaction Doctrine

Mastery of the Prohibited Transaction Rules of IRC 4975 may lead the self-directed investor to contemplate some clever deal structures to work around those.

Suppose you own an income producing property that you’d like your Solo 401k or Checkbook IRA to purchase, but knowing that as a “disqualified person” you can’t transact with your IRA you initially conclude that it can’t be done. Suddenly, you experience an epiphany – you could transfer title to the property from your name (or your LLC’s name) to your brother’s name, and he would subsequently sell the property to the self-directed retirement account. Eureka!

That stroke of brilliance has been had by many others and the courts have developed some judicial doctrines to analyze and characterize such transactions. One such doctrine is known as the Step Transaction Rule. Continue reading “Beyond Prohibited Transactions: The Step Transaction Doctrine”

Beyond Prohibited Transactions: The Plan Asset Rule

Checkbook QRP,  self-directed Solo 401k and checkbook-control IRA investors are aware (I hope that’s true) of the Prohibited Transaction Rules and Disqualified Persons discussed in IRC 4975. So, if you’re familiar with IRC 4975 are you covered? Or, do you need to know more than that to stay in compliance and protect your assets?

The Plan Asset Rule

There’s a lesser known extension of IRC 4975 in the Code of Federal Regulations that discusses something known as the Plan Asset Rule. In a nutshell, the Plan Asset Rule says that when retirement plans own a “significant” share of an entity, all of that entity’s assets are treated as assets of the retirement plans for purposes of the prohibited transaction rules. The implications of this can be staggering; if retirement plans collectively own a significant portion of an entity, all the disqualified persons of all the retirement plan investors are disqualified persons to that entity. Continue reading “Beyond Prohibited Transactions: The Plan Asset Rule”

Beyond Prohibited Transactions: The Exclusive Benefit Rule

Among the first concepts introduced to self-directed IRA and Solo 401(k) investors are “prohibited transactions” and “disqualified persons.” While those are certainly key concepts, there several others to be aware of; among those is the “Exclusive Benefit Rule.” Continue reading “Beyond Prohibited Transactions: The Exclusive Benefit Rule”

Beyond Prohibited Transactions: The DOL Interpretive Bulletin

Benefiting from tax-advantaged retirement funds before retirement age would be a beautiful thing, especially for those of that leverage the power of Solo 401(k)s and Checkbook IRAs. But, as that would defeat the intent of those accounts, the Prohibited Transaction Rules of IRC 4975 were created. Although written broadly, the innovative investor can contrive many ways to circumvent those rules.

However, beyond the letter of the law, the IRS has some additional tools at its disposal with which to counter creative strategies. Those include the Step Transaction Doctrine, the Exclusive Benefit Rule, and the Plan Asset Rule. For cases in which those rules may not apply, the IRS has the Department of Labor Interpretive Bulletin ERISA IB 75-2. Continue reading “Beyond Prohibited Transactions: The DOL Interpretive Bulletin”