Retirement Accounts

Individuals’ guarantees of loan to company owned by their IRAs were prohibited transactions.  The Tax Court has held that taxpayers’ guarantees of loans to a company, the stock of which was held by their individual retirement accounts (IRAs), to purchase another company’s assets, were prohibited transactions under the tax laws. As a result, their accounts ceased to be tax-exempt IRAs, and the taxpayers were liable for tax on the capital gains realized on the later sale of the company stock. The individuals argued their personal guarantees weren’t prohibited transactions because they covered loans to an entity owned by the IRAs, rather than a loan to the IRAs themselves. However, the Tax Court found that each of the individuals’ personal guarantees of the company loan was an indirect extension of credit to the IRAs, which is a prohibited transaction.

Aaron’s Take:  NEVER EVER EVER pledge IRA assets in any financial transaction. 


Sixty-day rollover rule waived for individual with medical impairments.  There is no immediate tax if distributions from traditional IRAs are rolled over to an IRA or other eligible retirement plan within 60 days of receipt of the distribution. A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). However, the IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). In a recent private letter ruling, the IRS waived the 60-day rollover requirement for a taxpayer who withdrew funds from her IRA and failed to timely roll them over due to medical conditions that impaired her ability to manage her financial affairs.

Aaron’s Take: Private letter rulings are applicable only to one taxpayer’s specific circumstance and cannot be used as precedent in any future case.  PLRs also require a special application fee.  This should be considered an exception, not a rule. 


Taxpayer could undo mistaken Roth IRA conversion.   Taxpayers, including married persons filing separately, may convert amounts in a traditional IRA to a Roth IRA, but the conversion is taxable. If the taxpayer had basis in the IRA-i.e., he had made nondeductible contributions to the IRA-the conversion would be includible in gross income only to the extent that the converted amount exceeded his basis. A recharacterization election allows a taxpayer to treat a traditional-IRA-to-Roth-IRA conversion as if it had never been made. This is sometimes done where the value of the assets in the account dropped significantly after the conversion. Normally, a recharacterization must be done not later than Oct. 15 of the year after the year of the conversion. But a taxpayer was able to undo a conversion beyond this deadline where his attorney mistakenly told him he had a large basis (and thus a small taxable amount) when in fact he had a zero basis. The attorney confused the cost of the securities in the account with the taxpayer’s basis in the IRA. The taxpayer got relief from the IRS after seeking it in a private letter ruling.

Aaron’s Take: The taxpayer was allowed to recharacterize due to “reasonable cause” – aka bad advice from his professionals.  Again, this case involves a non-precedential private letter ruling.

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