Self-directed IRA retirement/tax question…

Submitted by Andrew Vahaly on Wed, 2024-04-10 22:01

I converted my IRA to a self-directed IRA and bought a business with it.  I’m looking down the road at retirement and my assumption is that when the time comes, I’ll eventually get my business appraised and pay taxes (30%ish?) on the appraised value of the business and then own it free-and-clear of the retirement account.

But something tells me I’ve got that wrong, and I don’t know what the actual rule(s) are.  If anyone knows, please keep the explanation as simple as possible – I am far from an expert and easily confused.  “Explain it to me like I’m five.”  Thanks in advance to anyone who can help.



Submitted by Alan - IRA critic on Wed, 2024-04-10 23:38

There is no way to simplify the most complex type of IRA investment there is. Whether you used a ROBs approach or not, your self directed IRA custodian is the most likely to be familiar with all the pitfalls of these holdings, and some of them may provide you with written material on the issues, the most serious being a “prohibited transaction” which would result in a taxable distribution of the IRA. Another issue is the requirement of the custodian to report the year end value of all IRAs to you and the IRS on Form 5498 and disclose the type of investment in Box 15b. In most cases this is Code C (investment in an LLC).  Your custodian may require an annual appraisal of the business in order to complete the 5498.

Submitted by Andrew Vahaly on Thu, 2024-04-11 02:37

Thank you.  There have been no prohibited transactions, and my custodian has done all the necessary annual reporting (it doesn’t include an annual appraisal of my c-corp).  I called the custodian for an explanation of the retirement process and to see if my assumptions about the paying taxes on the appraisal was correct, and couldn’t make any sense of anything I was told.  That’s why I’m here to see if anyone can explain it to me.

Submitted by Alan - IRA critic on Thu, 2024-04-11 18:15

Generally, if your self directed IRA sells your business, the sales proceeds would remain in your IRA and there would be no income taxes due until you took IRA distributions. An appraisal of the business would affect what it sells for, but since it was owned by your tax deferred IRA the sales price would have no current tax impact even though your IRA balance may be higher or lower based on the business sale price.

All IRA distributions you eventually take will be taxable unless you have IRA basis from having made non deductible contributions in the past that were reported on Form 8606.

Submitted by Andrew Vahaly on Thu, 2024-04-11 18:21

What if I don’t sell the business, and simply want to convert from the IRA account to my own personal ownership upon retirement?  Will I pay taxes on the appraised amount and then own it free-and-clear of the IRA?

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