by the IRS is also taxable. Avoiding these violations is a big deal. You, your family members, and en- tities in which you have ownership are typically considered disquali- fied persons.

their retirement checks. To deal with this potential problem, the government issued an exemption from the prohibited transaction rules. Under the exemption, for the time between November 1, 1999, and De- cember 31, 2000, a disqualified person could loan money to their retirement plan under the following conditions: (a) No interest or other fee was charged to the plan (b) The proceeds of the loan or exten- sion of credit were used only for a purpose incidental to the ordinary operation of the plan which arises in connection with the plan’s inability to liquidate, or otherwise access its assets or access data as a result of a Y2K problem (c) The loan or extension of credit was unsecured (d) The loan or extension of credit was not directly or indirectly made by an employee benefit plan (e) The loan or extension of credit began on or after November 1, In summary: You could make a zero-percent-interest loan to your retirement plan so long as the loan was unsecured, repaid by December 31, 2000, and used to pay for short term hiccups related to Y2K. So how does this apply 17 years later? Well, remember this is a government program. When was the last time you’ve seen a government program stop? It does not happen often, and in this case, it has not happened yet. Due to various perceived crises since its inception, this handy exemption has stayed on the books and is now permanent. The current requirements to meet this exemp- tion are quite similar to the earlier exemp- tion. If you meet the requirements, you can 1999 and was repaid or terminated no later than December 31, 2000.

make a loan to your IRA to pay for ordinary operating expenses or an incidental purpose so long as the loan is for zero percent inter- est, unsecured, and put in writing if the loan is going to exceed 60 days.


THANK YOU, Y2K Fortunately for you and your condo

Now, let’s go back to the earlier exam- ple: The beach front condo in your IRA gets hit with an assessment you weren’t planning on and you don’t have enough cash in the IRA to pay the assessment. While you would certainly need to consult your lawyer or financial adviser, it is likely this situation would meet the terms of the exemption and you could make a zero-percent-interest loan to your IRA to cover the shortfall. Worried about distributions? The same would likely apply in that case as well if your IRA is short on cash when you turn 70 ½ and must start making withdrawals, also known as minimum distributions. You don’t necessarily have to worry about selling a property and or making distri- butions in kind of the real estate in your IRA. All you need to do is loan your account the amount of the distribution. As with any investment decision, it is important to work with the appropriate professionals to make sure that your IRA is fully compliant with all existing IRS regula- tions before implementing a new strategy. The examples in this article are extremely simple, and your specific account may have other factors in play that should affect your decision to leverage this strategy. The implications, however, are enormous and positive. If it is the right strategy for you, the option of making zero-percent loans to your IRA can dramatically expand your investing opportunities. •

investment, there is likely a solution for your cash-poor IRA. Let your mind drift back to 1999, when there was a really big scare about everyone’s computer simultaneously melting down when the date rolled from 1999 to 2000. This unfounded fear didn’t just affect the private sector. Our fearless govern- ment became concerned it as well. In particular, overseers of retirement plans were worried that if the computers ad- ministering retirement plans fell victim to Y2K, a lot of retirees wouldn’t receive MINIMUM DISTRIBUTIONS: The minimum amount that an IRA account holder must withdraw each year. Generally, these distributions are required starting at age 70 ½. Note: ROTH IRAs do not require these withdrawals until after the death of the owner. FULLYDISTRIBUTED: The contents of an IRA that is considered fully distributed may be taxed in their entirety. They are no longer tax-protected by the IRA.

Avoid This Real Estate IRA Pitfall by Reading the Fine Print AN OLD PROGRAM CAN STILL BENEFIT CASH-POOR IRA OWNERS.

by Tim Berry


ometimes, self-directed inves- tors using individual retirement

yourself for thinking about prohibited transactions, which are something that every self-directed investor needs at the forefront of their mind when making decisions about their IRA. Prohibit- ed transactions are a stringent set of laws that say, in effect, that if your IRA interacts with a disqualified person, your account will be completely distributed. That means everything in the account is immediately taxable and everything that you do with the account after the prohib- ited transaction but before discovery of it

the area shortly thereafter, and the condo association calls for a special assessment. Your IRA simply does not have the mon- ey inside it to pay the assessment. You want to use your own money to pay for the assessment, but believe that would violate IRS rules about interacting with your IRA and possibly result in huge taxes, fines, and penalties.

accounts (IRAs) to invest in real estate find themselves in the position of not having quite enough cash. An IRA that is real-estate rich but cash-poor can create serious stress for an investor worried about unforeseen expenses or making minimum distributions. Here is an example: You spend most of the money current- ly in your self-directed IRA to purchase a beachfront condo rental. A storm hits

Tim Berry is a self-directed IRA and 401(k) attorney who works with clients all over the United States and serves as legal counsel for Self-Directed Investor Society. He can be reached at

WHAT CAN YOU DO? Well, for starters, you can congratulate

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