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Spectacular IRA failure

Scott Maxwell - Thursday, January 02, 2014

A new year another tax case. OK, so it actually happened last year but who’s counting?

The case in question was one that involved IRA accounts, those plain vanilla sort of tax qualified accounts that most everyone has. The wrinkle here wasn’t new, but serves as a useful reminder to those who want to “push the envelope” a bit when it comes to the sorts of investments they purchase inside their IRA.

In this situation two IRA owners decided to use their IRA’s to purchase a business venture they wanted to own as an investment. So they created a company, used their IRA’s to purchase shares of it. With that done this corporation, newly flush with cash, went ahead and purchased the particular firm they had wanted to acquire. The fly in the ointment was that the new corporation wasn’t able to make the purchase with all cash and so the IRA owners acted as guarantors for loans used for that purpose. Sound innocent enough right?

Wrong. There is a whole body of law that describes “prohibited transactions”; transactions such as using an IRA to guarantee a loan as well as other actions that fall under the category of self-dealing.

One particularly interesting thing about this case was that the CPA who designed this particular strategy was the CPA of the business owner selling the business. A simple second opinion from an independent CPA might have prevented the unfortunate conclusion encountered. And just what was that conclusion? Somewhere in the $300,000 amount for each of the individuals involved between penalties and taxes owed.

Be careful when considering creative strategies that involve your IRA. The governing law is complicated and the opportunities for spectacular failures prevalent. And for goodness sake get a second opinion, or a couple of them!

More about this case can be read here.

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