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Home > Services > Domestic Wealth Planning > Qualified Plans - IRA strategies > Prohibited Transactions
There are many questions to be asked and an expert and certified planner should be consulted. If a person is eligible to contribute to a Roth IRA, it may be advisable and advantageous to rollover a traditional IRA to a Roth IRA.
When a person leaves a company or employment with an IRA there is no obligation to request an IRA rollover. The IRA may remain where it is. Usually when an employee leaves, they will be given sixty days to decide what to do with their IRA. There may be restrictions upon this process depending on the enrollment circumstances of the member.
Rollovers offer options enabling the owner the ability to keep track of the IRA. If an IRA is in a company who goes bankruptcy, the IRA may not be available to the owner. Rolling over an IRA to a new company also frees the owner from their old companies.
There are many threats today. Litigation, volatile markets, long-term health care risks and unstable business are a few of risks to owners and companies. IRAs are not products that are immune to instability.
IRA rollovers have precautions. If a person is filing bankruptcy, they should not rollover and IRA within one year because they could lose the protection of the IRS. The bankruptcy code only protects the first million held in an IRA. It can also be very risky when changing fiduciaries and beneficiaries. If a person gets married after starting an IRA, they may have to have written approval from the new spouse to name a beneficiary different from the original beneficiary.
What is a prohibited transaction?
There are also state laws qualifying what is exempt. Not only do the accounts have to stay qualified, so do the companies holding the IRA policies.
One of the easiest ways for a qualified account to be disqualified is for the account to engage in something called a prohibited transaction. When an IRA engages in a prohibited transaction, it loses its tax-exempt status and is no longer considered an IRA. Hence it is no longer “qualifed.
When this happens, sometimes the owner is not notified. This obviously can create a huge problem for the owner.
Innocently, often people have a family member manage their IRA. If the family member receives any commission at all, the account has engaged in a prohibited transaction. Another way of disqualifying the status of your retirement account is extending personal guarantees for your IRA account. Have you ever traded commodities or foreign currencies within your IRA? If you have, there was a high probability the brokerage firm required you to sign a personal guarantee. Amazingly enough, one of the largest stock brokerage firms in
the US requires individuals to personally guarantee any IRA opened with their firm. The bottom line is, if you sign that guarantee, you no longer have an IRA account nor do you have any Asset Protection for your hard-earned nest egg.
A final way that your IRA can become bait for your creditors is by following the advice of your financial planner. The government, in all its infinite wisdom, has decided the following: If you had a financial planner advising you with your retirement plan assets which you accumulated with an employer, your financial planner is now a fiduciary to those assets. No problem there at all, but the government then says if you later “roll over” those funds to the same advisor when you retire, quit, or are laid off, you have probably entered into a prohibited transaction.
If you are worried about your retirement assets being subject to the claims of any potential creditors, you need to check closely with a tax advisor familiar with the prohibited transaction rules and how they apply to retirement funds, otherwise you could be in for a horrible surprise.
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