Partnering IRA Funds with a Disqualified Person

The IRS goes to great lengths to explain the penalties of your IRA dealing with disqualified persons. These prohibited transactions can incur penalty, taxation, and even the loss of the tax-sheltered status of your account. However, there’s one investing tactic these regulations do allow that may surprise you, and that’s partnering IRA funds with a disqualified person.

Yes, it is true! Your IRA can partner funds with the funds of a disqualified person.

How Does Partnering IRA Funds with a Disqualified Person Work?

How to Partner IRA Funds with a Disqualified PersonThe idea here is commonly misunderstood, which is why lots of people don’t think it’s possible. IRC 4975 clearly lays down the laws of your IRA dealing with disqualified persons. For instance, your self-directed IRA is prohibited from selling property to or buying property from a disqualified person. (These people include your lineal descendants, ascendants, and their spouses.) So, of course you naturally think this rule applies to partnering your IRA with disqualified persons. Thank your lucky stars that it doesn’t.

Imagine pooling your IRAs funds with family members and friends who have the same interests and skills as you do.

The ability of partnering funds with disqualified persons gives you the opportunity of transacting with people you know and trust. You have the added benefit of discerning whether or not they can maintain their stake in the venture since you (hopefully) have some first-hand knowledge of their financial situation. That makes the partnership vetting process a whole lot easier than forging a partnership with strangers.

Increase Your Buying Power and Decrease Your Liability

This are other advantages of partnering funds with a disqualified person—or anyone, for that matter.

You’re able to leverage your IRA funds with others to participate in acquisitions on a larger scale. Maybe that’s a commercial property your IRA couldn’t buy alone. Or, it could be raw land that’s ripe for development that costs more than your IRA can afford.

Additionally, liability exposure is lessened if your IRA only owns a portion of the property. Instead of putting up the entire cost of a project, you could use just a portion of your IRA to invest as a partial owner. Therefore, your entire IRA is not at risk with one particular investment.

Your IRA Still Cannot Participate in Prohibited Transactions with Disqualified Persons

Even when those disqualified persons have partnered with your IRA, you must follow the IRS guidelines for compliance. Your IRA and its partners who are disqualified persons are not allowed to sell property to each other. You cannot participate in loaning funds to a disqualified person, or vacation in homes your partnerships invest in. Find the details by reading IRC 4975 and make sure your partners understand this, too. You don’t want to cross a line and get yourselves in the crosshairs of the IRS. When in doubt, consult a professional for guidance. We can point you in the direction of a competent or attorney or CPA to help with this aspect.

Partnering IRA funds with a disqualified person can involve intricate planning and knowledge. Contact Advanta IRA if you have questions on this subject. Our team is always ready to assist you in your self-directed investing endeavors.

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About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.