Self Directed Roth IRA Investment
I have a client took his Roth IRA, worth $100,000 at the time, and invested it fully into a manufacturing concern. The transaction took place in 2024. He was granted a 3% ownership interest in a LLC taxed as a partnership. He has no other investments in his Roth IRA. As of 12/31/2024 his capital account has decreased to $70,000 and currently the business has lost about $250,000 through May 2025. It is teetering on insolvency. Although his Roth IRA is disclosed as a limited LLC member on his K-1 in reality he does have managerial responsibilities within this business. He is often on site and does make business operating decisions. Thus, it appears that he has a prohibited business investment operating within his Roth IRA. Does this sound correct to you? If yes, I would recommend him distributing the Roth IRA’s ownership to him personally. Since it has lost money and the future is not certain I am not sure of the tax ramifications and/or excise taxes involved to do this. Can you please help me here?
Permalink Submitted by Alan - IRA critic on Mon, 2025-06-16 13:20
Yes, while his limited ownership is allowed, any active participation in the business constitutes a prohibited transaction as he is a “disqualified person” with respect to the IRA holding. Whether he is paid for any of these services is irrelevant, as he is still performing them. This is similar to an owned rental property in which the IRA owner personally completes a repair.
The Roth IRA is therefore treated as having been fully distributed as of 1/1/2025. Taxes on that distribution depend on his contribution basis, which he should have been tracking. Any tax due is calculated on Form 8606 unless the Roth IRA was qualified.
There may also be a 15% penalty on the amount that was involved in the prohibited transaction, although the IRS may not levy that if the Roth IRA is reported as distributed.