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IRA Prohibited Transaction |
The U.S. Department of Labor (DOL) in ERISA Opinion Letter No. 2009-03A has stated that the grant by an IRA owner to a broker of a security interest in his non-IRA accounts that would allow them to be used to cover debts of his IRA account would be a prohibited transaction under IRC §4975(c)(1)(B).
The DOL reasoned that the security interest would amount to a guarantee of the IRA’s debts by its owner – essentially an extension of credit from the IRA owner to the IRA. This arrangement is expressly prohibited by §4975(c)(1)(B) which includes the direct or indirect lending of money or other extension of credit between a plan and a disqualified person as a prohibited transaction.
The DOL also noted that the security interest is prohibited for several other reasons. They noted that IRC §4975(c)(1)(D) prohibits transfers to, or use by (or for benefit of) a disqualified person of the income or assets of a plan. Additionally, §4975(c)(1)(E) prohibits a disqualified person who is a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. Thus, the granting of the security interest would likely violate three different sections of the prohibited transaction statute – IRC §§ 4975(c)(1)(B), (D), and (E).
Note: This opinion letter illustrates how easy it can be to inadvertently step into a prohibited transaction. In this situation, a broker merely asked a client to sign a clause giving authorization to make transfers from his non-IRA accounts held by the broker in order to limit the broker’s liability on a new self-directed IRA account. Many clients may sign such an agreement thinking that it’s standard procedure. In fact, that innocent mistake could disqualify the IRA, causing the owner to be taxed on the full fair market value of the account.
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