SDIRA v. ROBS | Frank Selden Law


May you invest your IRA into your own business? Only if that business is not a "disqualified person" (DP). If the IRS reviews the transaction and determines that the business is a DP, then the transaction is prohibited, potentially disqualifying the entire IRA. Fortunately, there is a better approach.

SDIRA v. ROBS – Disqualified Persons

When an IRA invests in a corporation, that investment can be considered a prohibited transaction (PT) if the corporation is a “disqualified person” (DP) to the IRA. The corporation is a DP when 50 percent or more of the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, is owned directly or indirectly or held by a DP. [26 USC 4975(e)(2)(G)]

It sounds like “control” to me. If one controls a corporation by voting or directly or indirectly controlling 50% or more of the stock, then the corporation is a DP and the investment is prohibited. Not allowed to use an IRA.

Why are we allowed to use a 401K plan? Yes, the plan sponsor is a DP to the plan. However, the investment from an employer-sponsored plan into the stock of the employer is exempted from the PT rules. I meet many people who look at the investment in a ROBS arrangement as assurance that “qualified funds into a corporation that one controls” is therefore allowed. I don’t know if this is the opinion of the article’s author, but she does seem to bypass the issues of the IRA investment itself to focus on the PT aspects of subsequent transactions.

When all of the ROBS components are placed together correctly, a plan’s investment into the corporation is not a PT whereas an IRA investment into the same corporation is a PT. Both are qualified or retirement funds. Different rules.

SDIRA v. ROBS – Prohibited Transactions

The article cites a case in which someone guaranteed a loan on behalf of a company that they did not control. This case is one of the ones listed on the SDIRA page of my website. You can easily discover which one. This is not a good case to cite as an example of investing in a company one controls. The individual did not, and if they did I contend that the IRS would have considered the initial investment itself as prohibited. Regardless, the company owned by the qualified funds need more funds. The IRA owner guaranteed a loan. The tax court agreed with the IRS that this guarantee constituted a PT.

May someone guarantee a loan to a corporation into which their plan funds are invested? If the corporation is an “operating company”, yes.  Why? Again, a different set of rules between a Plan and an IRA. If the taxpayer in the above case used a properly structured ROBS rather than an IRA investment, both the investment and the guarantee would have been proper.

We Take Out The Confusion

We take out the confusion like some people take out the trash. You don’t need it, just makes everything smell bad after a while. The goal is to use the right instrument to meet your objectives and educate accordingly. We create both concepts and want what is right for you. If you do not know whether a ROBS or SDIRA is better for your objectives, call me at 206.249.7979. You may also download my ROBS e-book or schedule a time for me to call you here.

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