When deciding on an investment, you may wonder if it’s okay to partner with an IRA. In general, it’s not usually wise to mix personal with IRA funds. The complicated rules set forth by the IRS may make co-mingling funds a difficult task. In the following, we’ll discuss the rules for investing with an IRA. Further, we’ll talk about how to possibly use personal funds to partner with an IRA.
Rules for Investing with an IRA
Look no further than Internal Revenue Codes 4975 and 408 when it comes to investing with retirement funds. These rules cite what types of investments are prohibited with IRA funds. Specifically, concerning Self-Directed IRAs. Unlike a typical, financial institution IRA, a Self-Directed IRA is not limited to traditional investments, such as stocks and mutual funds. A Self-Directed IRA allows one to invest in alternative investments, including real estate and precious metals. Therefore, it’s important to pay attention to what you cannot invest in with your IRA. Basically, you can’t use your IRA to invest in life insurance or most collectibles, like art, rugs and classic cars. Just about everything else, so long as it’s legal on the federal level, is allowed.
One other thing you need to pay attention to is transactions involving a disqualified person. Essentially, only the IRA can benefit from an investment. Disqualified persons include you (the IRA owner), your spouse and lineal ascendants and descendants (parents, children and their spouses). Note there are a few other people who are considered disqualified. The reason being is that you are already receiving tax benefits from the IRA. Therefore, the IRS deems any other benefit to you personally is prohibited.
Here are a few examples of prohibited transactions:
- You purchase an income property with your Self-Directed IRA and rent it out to your son.
- You borrow money from your IRA.
- A house is purchased from your father with IRA funds.
Again, as long as the transaction does not involve a disqualified person, you are generally in the clear. Brothers, sisters, aunts, uncles and friends are not disqualified, therefore a transaction involving them are permissible.
Can You Partner with an IRA?
Technically, there are instances where you can partner with an IRA. However, you should tread lightly when doing so. The risk of audit and penalties are greater when mixing funds. A clear example is outlined in the Kellerman Case. The Kellermans used both personal assets and IRA assets to invest in a real estate property. The sole purpose of the investment was to develop adjoining parcels of land. Since the investment benefited the Kellermans, in addition to the IRA, the transaction was deemed prohibited. Again, the investment is not allowed if the the IRA is not the sole beneficiary of said investment.
What if You Don’t NEED IRA Funds?
There is a way to partner with an IRA that shouldn’t be considered a prohibited transaction. If you have the personal funds to buy a property outright, you should be in the clear. For example, you have $300,000 in a bank account and you want to purchase a property worth $150,000. Obviously, you have enough funds to buy the property outright. However, you want to use the $100,000 in your Self-Directed IRA to receive the tax benefits.
Partnering with an IRA would seem perfectly fine in this situation. The only entity that is benefiting is the IRA. Let’s say you decide to sell the property in a a few years for $200,000. Since your IRA purchased a 2/3 stake in the original deal, the IRA must retain 2/3 of the sale price. That way, you don’t receive any extra benefits from the sale of the property.
Is it Worth it to Partner with an IRA?
The short answer is no. The IRS will come down on you hard if they think you are improperly mixing IRA and personal funds. If you do decide to attempt this, you should make sure your attorney or tax specialist reviews all the details. Even if everything is on the up and up, the IRS will scrutinize every detail of the transaction. Don’t take that chance! Look for a different investment, or a way to contribute more to the plan.