Clients will often ask me what I think is the most important thing for them to learn before they have us set them up with a CheckBook IRA LLC. I always answer that the subject of prohibited transactions is by far the most important. It can sometimes seem a bit confusing, especially for those who have just found out they can combine a self directed IRA and LLC, but hopefully this series will make it a bit easier.
(NOTE : For purposes of this series, I will use disregarded and prohibited interchangeably; they mean the same thing. So, a disqualified person is the same as a prohibited person or party, a prohibited entity is the same as a disqualified entity, etc…)
The first thing we’ll look at the section of the code that talks about prohibited transactions. Let’s look at USC›Title 26›Subtitle D›Chapter 43›§ 4975 (c)(1):
(c) Prohibited transaction
(1) General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
So there it is. You could take this entire section and reduce it to the following sentence “Any direct or indirect deal or transaction of any kind between a plan and any disqualified person is a prohibited transaction.” Pretty straightforward, but I can’t emphasize how important it is to understand that any deal or transaction of any kind, between any prohibited person is off-limits. This is a black and white rule; no exceptions.
Further, notice that the Service has used the words “direct or indirect” to encompass as wide a berth as possible. We’ll get into some examples in a later post, but for now its pretty much common sense. If a prohibited person deals with, or benefits from any deal or transaction that the CheckBook IRA LLC engages in, then it’s prohibited. Now that we know that a prohibited transaction occurs when the CheckBook IRA LLC deals with a prohibited person, in the next part we’ll identify exactly who is considered a prohibited person.
Invest intelligently. Enjoy the rewards.