IRA prohibited transaction
Hi,
Thank you for your reply to a previous post. A follow-up question please. Does the situation described below apply to Roth IRAs as well as Traditional IRAs? Please see below and thanks again.
http://www.thestreet.com/funds/iras/10387561.html
The above article (dated 2007) mentions that if a broker or investment adviser manages a relative’s IRA for compensation, this arrangement is a prohibited transaction which can result in the entire IRA balance becoming taxable. The article states that this is a tax code glitch that is largely unenforced. The article also mentions Ed Slott’s name.
I am wondering if this article was accurate, and if this situation still exists or if it has been corrected.
It doesn’t seem proper to not allow an investment advisor to manage a relative’s IRA for a fee just like they do for all of their other clients.
I’d appreciate any comments you might have. Thanks.
Prohibited Transaction
mgtf4cpa – Fri, 2013-07-26 12:33.
There has been no change in the law. The situation as described in an Ed Slott Ira Advisor newsletter is correct.Tax laws do not always have results we think are proper.
Permalink Submitted by Alan - IRA critic on Wed, 2013-08-21 00:37
Nothing has changed here with respect to IRS action to resolve this conflict, In addition, I do not know the extent of brokerage imposed restrictions on managing IRAs for relatives, but if the broker does not restrict the management, the IRA owner may wish to avoid the exposure since it’s their IRA that would be distributed if the IRS acted.
Permalink Submitted by Peggy Fisher on Thu, 2013-08-22 15:14
Could you expend upon why a advisor managing a family members IRA for compensation?For example, is it because the Advisor would be considered a Disqualified Person because of the potential for self interest? The advisor could make recommendation that would benefit them instead of the relative.
Permalink Submitted by chris erickson on Wed, 2013-08-28 14:07
The advisor manages all of his clients’ accounts for a flat annual fee of 1% per year. The advisor receives no commission compensation. The advisor’s sole compensation arises from managing client accounts for the above annual fee and is subject to a fiduciary duty for all of his clients’ accounts. One of his clients is also his father. The advisor is wondering if he can charge his father the same 1% fee that he charges all of his other clients. For that matter, the advisor’s father wants to pay the advisor 1% per year, just like all other clients do. Because the advisor is a fee-only RIA with the fee based on a % of assets, there is no way the advisor could make a recommendation that would benefit the advisor instead of his father.
Permalink Submitted by Peggy Fisher on Tue, 2013-09-03 15:36
Interesting topic. I read the article that was linked to this topic. And I also tried to locate addition information on the IRS website. I could not find where it tied a family member as an adviosr on an IRA account as prohibited transacton.Could you please provide addtional informtion?
Permalink Submitted by mk foss on Tue, 2013-09-03 16:43
You need to read Internal Revenue Code provisions for prohibited transactions and the definition of a disqualified person. If the IRA owner or a close relative benefits from the IRA, there is a problem. Why would someone think that using a relative as an investment advisor or a property manager would not provide a benefit to that person?
Permalink Submitted by chris erickson on Wed, 2013-09-04 15:28
Sorry I chose the wrong words. There clearly would be a benefit to the advisor because he would receive compensation, but unlike commission arrangements which pose a conflict of interest, a fee-based arrangement has no conflict of interest between the client and the manager. I don’t know whether the underlying issue is commission compensation which involves a conflict of interest, or any type of compensation even if there is no conflict of interest. The original article mentioned commission compensation (“even $1 of commissions) but maybe that was just an example and any form of compensation is the issue. Could you please clarify? Thanks again.
Permalink Submitted by Peggy Fisher on Wed, 2013-09-04 18:29
At the risk of beating a dead horse. I had a CPA look a up few regs for me useing his software.Internal Revenue Code 4975 Tax. If you piece three sections together you get a member of the family as a “disqualified Person” therefore maybe a prohibited transaction.If you look up Code 4975, under (e) Definitions then (2) Disqualifed person then (2)(f) then (6) member family and pull it all together I think that might be how you get to an adviosor who is a family member being a prohibited transacton resulting in the IRA balance becoming taxable.I would love a second opinion on this. Please.
Permalink Submitted by Joe Luby on Thu, 2013-09-05 15:32
I have only casually followed the various strings on this topic but wanted to weigh in with a comment on the exemptions. There is no doubt that certain family members are considered disqualified persons. On the surface then it would lead to the quick conclusion that any transfer of monies between an IRA and its disqualified person/investment advisor (i.e. via commissions or advisory fees for investment selection and management) would constitute a prohibited transaction under section 4975(c)(1).However, it would also seem that an exemption applies in such a case under the exemptions listed in section 4975(d). Specifically, section 4975(d)(10) provides an exemption to the prohibited transaction penalties in the case of “receipt by a disqualified person of any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan.” Provided that the advisor/disqualified person’s compensation is reasonable and is paid for services rendered, I don’t see why this particular exemption would not apply. Perhaps there is a ruling or case of some sort that touches on this that I’m not aware of, and if so, hopefully someone can add a cite to it in this string. But short of that, it seems this exemption would serve to alleviate any issues with a family member/disqualified person who is also acting in their capacity as an investment manager to another family member’s IRA.
Permalink Submitted by Peggy Fisher on Thu, 2013-09-05 21:35
I emailed the author of the article, Suzanne Barlyn, of THE STREET to see if she wanted to weigh in on your find. I hope she does.