Plan Asset Regulations

Creating the biggest bucket of wealth for retirement with your self-directed IRA doesn’t just come from doing good investments. It also comes from understanding how your IRA works so you can utilize it to the best of its abilities. Learning about the freedom IRAs have is important, but knowing about their certain rules, as well, is equally as necessary. 

Plan Asset Rules 

IRAs not only follow the guidelines put in place by the IRS, but they also listen to the Department of Labor or “DOL”. A very important term called Plan Asset Rules is a set of criteria that was put in place by the DOL to limit an investor from using his or her retirement funds to transact with their own investment fund or assets. 

These Plan Asset Rules define when the assets of a certain entity are considered assets that belong to a 401k or IRA. According to these Plan Asset Rules, if an account holder owns more than a 25% of an “investment” company, the profits and assets of that entity are considered assets of the IRA or other certain accounts. This concept is sometimes referred to as the Look-Through Rule.

This means that if your IRA owns a quarter or more of the membership interests of a LLC engaged in passive investments like hedge funds or real estate funds, the assets of the company can reasonably be considered the property of the retirement account.

If the Plan Asset Rules cause the assets of an investment company to be deemed to be assets of the IRA/401(k), any exchange involving the investment company and someone who isn’t allowed to participate (known as a disqualified person) will be a prohibited transaction. 

Plan Asset Rules can come into play if:

  • 100% of an “operating company” is owned by any combination of IRAs or 401Ks and disqualified persons. If this happens, all of the company’s assets are deemed plan assets and they belong to the IRA or 401K.
  • 25% or more of an “investment company” is owned by IRAs or 401Ks and disqualified persons. Similarly, if this happens, all the assets of the “investment company” are deemed Plan assets (assets of the IRA/401(k)). When the DOL determines whether the 25% mark is met, all IRAs/401(k) owners are considered, even if they are owned by unrelated individuals.

Way to get around Plan Asset Rules?

There are exemptions to the Plan Asset Rules. The Plan Asset Rules do not apply if the entity is an “operating company” (which refers to a partnership, LLC, or other business structure in which the main goal and method of money-making is via venture capitalism, real estate investments, or making or providing goods and services) or if partnership interests or membership interests are available to members of the general public. 

In other words, if an IRA or 401(k) Plan owns less than 100% of an LLC that is engaged in an active trade or business, the Plan Asset Rules would not apply. The investment could still be treated as a prohibited transaction and potential Unrelated Business Income Tax could still apply.  

How does it affect my IRA?

Plan Asset Rules affect everyone, but most investments involving IRA funds will not kick in the Plan Asset Rules. The Plan Asset Rules are usually only triggered if the IRA or 401(k) Plan assets will own greater than 25% of an investment company (i.e. a passive investment fund) or will own 100% of an operating company, like in the examples above.

There can be serious consequences to violating the Plan Asset Rules. If your self-directed IRA or 401k investment involves an investment that violates the Plan Asset Rules, all of the assets of the entity will now be owned by the IRA or 401K, meaning all transactions between the investment entity or its assets and a disqualified person may be prohibited.

Plan Asset Rules are important for any investor looking to self-direct. To get more information about Plan Asset Rules, our Certified IRA Specialists are happy to help! For more questions, give us a call at 855-FUN-IRAS (855.386.4727).

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