The Self-Directed IRA Plan Asset Rules

When you open an individual retirement account (IRA), you do so as a way of saving for your golden years. An IRA allows you to invest in mutual funds, stocks and bonds. However, a self-directed IRA, also known as a SDIRA, permits much more.

With your SDIRA, you can invest in real estate, private placements, precious metals and more. In fact, with a SDIRA, you can invest in almost anything. However, there are some rules. The Department of Labor (DOL) established the Plan Asset Rules as a way to define what is considered an IRA asset. By understanding this rule, you can avoid participating in a prohibited transaction.

Plan Asset Rules

The Plan Asset Rules are also referred to as “Look-Through” Rules. Two main things can trigger the Plan Asset Rules. These are:

• Operating Company: If an IRA (or group of them) and a disqualified person owns 100% of an “operating company," the assets of that company are considered to be belonging to the plan.
• Investment Company. If an IRA and disqualified person owns at least 25% of an investment company, all assets belonging to the company also belong to the IRA.

Exceptions to the Plan Asset Rules

There are certain exceptions to the DOL Plan Asset Rules. We noted the rules as they apply to an operating company—a partnership or limited liability company (LLC) that typically engages in the development of real estate as well as venture capital or companies that provide various goods and services. When it comes to an operating company, if the plan does not own 100% of the partnership or LLC, then the DOL rules do not apply.

However, you should still review and understand prohibited transactions as defined by the IRS. These transactions can cause the IRS to treat your actions as an early distribution. This will result in penalties! The Plan Asset Rules will also not apply if the operating company, or the interests of the partnership or membership, are publicly offered. The same is true if the interests are registered under the Investment Company Act of 1940.

Impact and Consequences

In reality, many of your investments will not trigger the DOL’s Plan Asset Rules. Direct purchases of real estate, precious metals and many other types of transactions performed on behalf of your plan will not trip the Plan Asset Rules. In fact, even if it otherwise would, as long as a disqualified person does not participate in the transaction, you will not trigger these rules.

Violating the DOL’s Plan Asset Rules does come with consequences. However, when you establish a SDIRA with a reputable law firm, avoiding these consequences is easy.