
INSIGHTS FROM OUR NATIONAL TAX OFFICE	JUNE 2, 2016

Self-Directed IRAs: A Cautionary Tale

IRAs (Individual Retirement Accounts) provide many advantages for owners, including the ability to save for retirement tax-deferred. While the benefits of IRAs are considerable, if used incorrectly they can create sizable and unforeseen tax burdens.

Unfortunately, this was the case for James and Judith Thiessen, who chose to roll their tax-deferred retirement funds into a newly formed self-directed IRA. The Thiessens used the IRA funds to invest in James's own startup company, Elsara Inc. Elsara then used the proceeds from the IRA and seller financing to purchase the assets of a business. The seller financing required James and Judith to personally guarantee the debt to the seller.

Due to the complex rules surrounding IRAs, James and Judith had unknowingly participated in a series of prohibited transactions which negated the tax-saving status of their self-directed IRA. Consequently, the Thiessens paid a hefty tax on what was meant to be a tax-free transaction.

There is generally little concern about timely rolling retirement savings into a self-directed IRA. However, the broad sweeping rules defining prohibited transactions have caused many, like the Thiessens, to forfeit tax savings when subsequent use of transferred funds involves disqualified persons. By understanding the essentials of prohibited transactions and working closely with a tax expert, IRA owners should be able to avoid any unexpected taxes or fees on IRA transactions.

Click here to learn more about disqualified persons, prohibited investments and prohibited transactions.

Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, IRS controversy and procedures, R&D tax incentives, tax-exempt organizations, tax legislation, accounting methods and pass-through entities.

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This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Eide Bailly LLP and the author do not assume responsibility for any individual's reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique before recommending the technique to a client or implementing it on the client's behalf. To request reprints of this publication, send a written request to RequestReprints@eidebailly.com. © 2016 Eide Bailly LLP.