Is your IRA operating a business? If so watch out!

The biggest source of your wealth may be your individual retirement account (“IRA”).  It  may be tempting to invest that IRA in your friend’s latest great business idea,  owning and leasing property or “get rich quick” ideas. A promoter may suggest creating and operating an LLC inside your IRA. Unfortunately there are little known rules that govern IRAs. One of the rules is a prohibited transaction rule and the disqualified person. Generally a disqualified person is the one creating the IRA (you) and the prohibited transaction can include managing the rental property or taking profits from the IRA. There are “workarounds” and attorneys and companies who specialize in this area but it is not for the faint of heart and disqualification of the IRA can cause the WHOLE IRA to be immediately taxable! Not a good situation.

In a recent case, Ellis, TC Memo 2013-245, Mr. Ellis operated a used car business in an LLC which was owned by his IRA. He received compensation, ran the business, etc. Unfortunately for him the Internal Revenue Service determined that there was a a prohibited transaction by a disqualified person and that the WHOLE IRA was taxed.

If you are going down this road, consult with a competent advisor.
 
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