Recent IRS Tax Court Prohibited Transaction Case Could Have Been Avoided by Use of Solo 401(k) Loan, According to IRA Financial Group Tax Attorney
Miami, FL (PRWEB) July 08, 2013 -- The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), reinforced the IRA prohibited transaction rule that a taxpayer’s personal guaranty of a loan by a corporation owned by the individual’s IRA is a prohibited transaction under section 4975(c)(1)(B). The Court found that the taxpayers had provided an indirect extension of credit to the IRAs, a prohibited transaction under Internal Revenue Code § 4975 that disqualified the IRAs. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. By using a Solo 401k loan, a self-employed individual or small business owner with no employees would be able to use the lesser of $50,000 or 50% of the plan account value to make a business investment without triggering a tax or penalty.
"Using a Solo 401(k) Plan would have allowed Mr. Peek to use up to $50,000 of retirement funds to invest in a business and circumvent any of the IRA prohibited transaction rules," stated Maria Ritsi, a senior paralegal with the IRA Financial Group. "The use of the Solo 401(k) Plan would have also allowed Mr. Peek to personally guarantee the business loan since the business would have been owned by him and not his retirement fund," stated Ms. Ritsi.
In the Peek case, the U.S. Tax Court ruled that a taxpayer’s personal guaranty of a loan by a corporation owned by the individual’s IRA is a prohibited transaction under section 4975(c)(1)(B). The Court found that the taxpayers had provided an indirect extension of credit to the IRAs, a prohibited transaction under Internal Revenue Code § 4975 that disqualified the IRAs.
According to Ms Ritsi, the main difference between the Peek case and the Solo 401k loan strategy is, "the Peek case involved the use of IRA funds which does not offer a loan feature. By using a 401(k) Plan, Mr. Peek would have been able to borrow up to $50,000 from his 401(k) Plan and use those funds to invest in his business. The advantage of the Solo 401(k) loan versus a self directed IRA is that it would have offered Mr. Peek the ability to be personally involved in the business," Note – Mr. Peek would have had to be self-employed in order to take advantage of the Solo 401(k) loan strategy.
The Peek decision underscores the importance of working with professional tax advisors before using retirement funds to make a non-traditional investment using retirement funds. "Because the rules involved in using retirement funds to make investments are so complicated, it is imperative to work with tax experts before using retirement funds to make non-traditional investments," stated Adam Bergman, a tax attorney with the IRA Financial Group. "Mr. Peek is an attorney and was advised by an accountant and still engaged in a prohibited transaction so it is vital that one works with tax experts that have specific experience in the area of retirement funds," stated Mr. Bergman.
The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP and Dewey & LeBoeuf LLP.
IRA Financial Group is the market’s leading “Checkbook Control” Self Directed IRA and Solo 401k Plan Facilitator. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate tax-free and without custodian consent!
To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.
Jaclyn Baily, IRA Financial Group, LLC, http://www.irafinancialgroup.com, 800-472-0646 9, [email protected]
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