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Allowing someone to make a prohibited transaction and then simply pay a 100% penalty after-the-fact, especially when the initial transaction was extremely-low-p
by nrmitchi 5y ago
Allowing someone to make a prohibited transaction and then simply pay a 100% penalty after-the-fact, especially when the initial transaction was extremely-low-priced to begin with, is clearly open for abuse. What is to stop me from selling myself a couple houses into my IRA for $5 a piece, saying "whoops, I guess that was a prohibited transaction. I'll pay the 100% penalty of $5."
That is why IRC Section 408(e)(2) stipulates that the IRA itself is fully “disqualified” – which means it loses its tax-deferred status, and is treated as though it was fully liquidated in a taxable distribution as of January 1st of the tax year in which the prohibited transaction occurred.
- vmception 5y agoDisqualification notably only occurs with prohibited transactions between the owner/beneficiary. Not entities where the owner is a director, that can only incur a penalty. If the transaction isn’t unwound its a 100% penalty. Try this source or find a similar source that you respect: https://www.kitces.com/blog/self-directed-ira-prohibited-transaction-fiduciary-disqualified-person-irc-section-4975/#tax-consequences-and-penalties-for-engaging-in-a-selfdirected-ira-prohibited-transaction https://www.kitces.com/blog/self-directed-ira-prohibited-tra... The law itself doesn't make that very clear, thats how its been interpreted and acted upon Again, we are still starting from two different assumptions: I dont consider earning money to be abusive, I dont consider taking risks with your own private equity in a tax deferred account to be abusive. Its great that these accounts are allowed to take risks.