taxable distribution or investment transaction | Ed Slott and Company, LLC

taxable distribution or investment transaction

scenario: Client directs $1.5 million distribution from IRA to his business checking acct. Subsequently wires the $1.5 million from his business acct to invest in promissory note for a company owned by his business. Has promissory note drafted with his IRA as the lender. I see 2 serious issues with this. What do you see?

2 serious issues.

Asking what issues do you see? I want to know if you see the same issues that I do.

1) Very large taxable distribution triggering the higher marginal tax rates unless he can complete a rollover in time. The note cannot be considered as a rollover as indicated below. 2) Using the IRA as collateral for a loan is a prohibited transaction in the event this is restructured with the IRA not being the actual lender. 3) If he has majority ownership in the business which owns the subsidiary, the company is also a "disqualified person" with respect to his IRA and could not deal with the IRA in any capacity. This is also a prohibited transaction. 4) It may be too late to roll back the funds to the IRA. If 60 days has passed since the distribution it will take a private letter ruling from the IRS to extend the 60 days. Fees for rollover issues are at least less than the general letter ruling fees. Technically, the minute this was executed a prohibited transaction occurred. Perhaps it can be rescinded with the help of legal counsel depending on state law.

Thanks for your input. 60 day rollover limit has long since passed.

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