Self Directed Ira question

8 Replies

I had some funds remaining in my self directed ira and wanted to see if this would be an acceptable transaction.

Here's the scenario:

Tyler's (me) Ira lends 50k to John (made up individual) via secured promissory note

John’s ira lends 50k to Tyler (me) via secured promissory note

John wouldn't be a family member.

Is this an acceptable transaction?

Thanks

Yes and no.

The transactions themselves are valid because they take place between non-disqualified persons. However, the end result would be considered an arrangement whereby the transaction was for personal benefit and not for the benefit of the IRA.

To clarify, an arrangement is considered a prohibited transaction.

I agree with Loren. You're basically trying to get around the rules of having a retirement plan. One other option that might be harder to contest is if each of you have separate businesses and the loans were made to the businesses. As long as the money is used for biz purposes, it would be hard to contest the arrangement.

However, why not roll your money into a 401k (assuming it's a traditional IRA, not Roth), and then take a loan out? You can get up to $50k or 50%, whichever is less in a loan that you can repay over five years. This would eliminate any chance of losing all your money to fines, fees, and taxes.

This is called reciprocal lending and is a linked transaction to a prohibited transaction. You are using your IRA funds to ultimately gain a personal benefit (as is your friend) - access to cash that is otherwise unavailable sitting in your IRA.

Furthermore - you cannot lend the money to your friend from your IRA, and then have him give you the money personally (outside of his IRA). Again, this is a Prohibited Transaction. Anything that results in direct, implied or even the appearance of personal benefit is prohibited.

@Doreen Chaisson  and @Loren Whitney 

you guys seem to be the experts in this area and I have a follow up question for you. I'm considering purchasing investment property in my ret. acct. but before I buy it I will have to travel to the area where the property is located and will have some expenses. Will I have to pay travel and other related expenses with my personal funds or with my ret. funds (after all there is a possibility that the offer may not go through)?

Unfortunately, that would be a personal expense. Much in the same way your gas, car wear and tear, and time to travel to your local broker to buy IBM stock would not be reimbursed as an IRA expense.

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