Quote:
Originally Posted by kokonutty
Yes, that is the basic ruling but it looks like he's trying to find a way to insulate the Roth from the holder. I'd be surprised if the laws didn't have a loophole or two such as through a trust or corporation. Can the maintenance and management be contracted through a company the holder owns or owns a part of?
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Well you never know unless you talk to an expert. I understand what he is trying to do but I believe there is no way to isolate himself by using a company he owns. In the end he wishes to be the 100 percent beneficiary in the end utilizing the company which means he would likely have to be 100 percent owner. I posted earlier about prohibited transactions.
It seems like he would be engaging in at least one if not more of these circumstances.
As I said, it would be a shame to set this up and many years later get taxed and penalized for it.
See
https://www.irafinancialgroup.com/le...cted-roth-ira/
definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the Roth IRA holder, any ancestors or lineal descendants of the Roth IRA holder, and entities in which the Roth IRA holder holds a controlling equity or management interest. In essence, under Code Section 4975, a “Disqualified Person” means:
A fiduciary (e.g., the Roth IRA holder, participant, or person having authority over making Roth IRA investments),
A person providing services to the plan (e.g., the trustee or custodian),
An employer, any of whose employees are covered by the plan (this generally is not applicable to Roth IRAs but dos include the owner of a business that establishes a qualified retirement plan),
An employee organization any of whose members are covered by the Plan (this generally is not applicable to Roth IRAs),
A 50 percent owner of C or D above,
A family member of A, B, C, or D above (family members include the fiduciary’s spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren (but not parents-in-law),
An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by A, B, C, D, or E. Whether an entity is a disqualified person is determined by considering the indirect stockholdings/interest which would be taken into account under Code Sec. 267(c), except that members of a fiduciary’s family are the family members under Code Sec. 4975(e)(6) (lineal descendants) for purposes of determining disqualified persons.
A 10 percent owner, officer, director, or highly compensated employee of C, D, E, or G,
A 10 percent or more partner or joint venturer of a person described in C, D, E, or G.
Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.
Self-Directed Roth IRA Prohibited Transactions
Pursuant to Internal Revenue Code Section 4975, a Self Directed Roth IRA is prohibited from engaging in certain types of transactions. The types of prohibited transactions can be best understood by dividing them into three categories: Direct Prohibited Transactions, Self-Dealing Prohibited Transactions, and Conflict of Interest Prohibited Transactions.
Direct Prohibited Transactions
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Direct Prohibited Transaction” generally involves one of the following:
4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified person”
Example 1: Tim sells an interest in a piece of property owned by his Roth IRA to his son.
Example 2: Cindy leases real estate owned by her Roth IRA to her father.
Example 3: Jerry uses his Roth IRA funds to purchase an LLC interest owned by his son.
4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”
Example 1: Paul lends his wife $10,000 from his Roth IRA.
Example 2: Jill personally guarantees a bank loan to her Roth IRA.
Example 3: Bill uses Roth IRA funds to lend an entity owned and controlled by his mother $60,000.
4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”
Example 1: Rick buys a piece of property with his Roth IRA funds and hires his father to work on the property.
Example 2: Betsy buys a home with her Roth IRA funds and personally fixes it up.
Example 3: Nicky owns an apartment building with her Roth IRA and hires her father to manage the property.
Indirect Prohibited Transactions
4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA
Example 1: Allan is in a financial jam and takes $18,000 from his Roth IRA to pay his mortgage and credit card bill.
Example 2: Larry uses his Roth IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Larry and transfers those funds back to Larry.
Example 3: Tracy invests her Roth IRA funds in a real estate fund and then receives a salary for managing the fund.
Self-Dealing Prohibited Transactions
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Self-Dealing Prohibited Transaction” generally involves one of the following:
4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account
Example 1: Beth who is a real estate agent uses her Roth IRA funds to buy a home and earns a commission from the sale.
Example 2: Jim wants to buy a piece of property for $150,000 and would like to own the property personally but does not have sufficient funds. As a result, Jim uses $120,000 from in his Roth IRA and $30,000 personally to make the investment.
Example 3: Jen uses her Roth IRA funds to invest in a real estate fund managed by her Son. Jen’s son receives a bonus for securing Jen’s investment.
Conflict of Interest Prohibited Transactions
Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:
4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA.
Example 1: Craig uses his Roth IRA funds to loan money to a company in which he manages and controls but owns a small ownership interest in.
Example 2: Tiffany uses her Roth IRA to lend money to a business that she works for in order to secure a promotion.
Example 3: Jason uses his IRA funds to invest in a hedge fund that he manages and where his management fee is based on the total value of the fund’s assets.
Statutory Exemptions
Under Internal Revenue Code Section 4975(d), Congress created certain statutory exemptions from the prohibited transaction rules outlined under Internal Revenue Code Section 4975(c). For these certain transaction, Congress believed there is a legitimate reason to permit them. For these transactions, Congress has issued a blanket statutory exemptions permitting these transactions assuming that certain requirements specified are satisfied. Below is a list of some of the statutory exemptions found in Internal Revenue Code Section 4975(d) that apply to Roth IRAs:
Any contract with a disqualified person for office space, legal, accounting or other services necessary for the operation of the Roth IRA as long as reasonable compensation is paid. Note – this exemption does not apply to a Roth IRA fiduciary (the Roth IRA holder) as per Treasury Regulation Section 54.4975-6(a)(5).
The provision of ancillary services to a Roth IRA by a bank trustee
receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries;
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