IRA and Solo 401k Plan Assets not always exempt from bankruptcy

In Daniels v. Agin bankruptcy court case involving debtor’s IRAs and profit sharing plan, the court basically ruled that the debtor’s IRAs, which were originally funded via rollover from his 401k profit sharing plan, were not exempt from creditors bankruptcy estate because the IRA participant had engaged in prohibited transactions with his 401k profit sharing plan pursuant to IRC 4975.

It is important to point out that had the debtor’s IRAs or 401k profit sharing plan not been deemed to have engaged in prohibited transactions, “the debtor’s retirement plan assets would have been exempt from creditors under Bankruptcy Code Sec. 522(b)(4)(B) if the fund is in substantial compliance with the applicable requirements of the internal revenue code, or if not in substantial compliance, the debtor is not materially responsible for the failure.

Instead, the court discovered that the debtor had subjected the plan’s assets to many prohibited transactions such as loaning the plan’s funds to the debtor’s son and involving the plan in real estate transactions with the debtor’s family members.  The debtor was ultimately responsible for the plan’s assets because the debtor was managing them.

Similar to a where the self-employed business owner manages the assets of the self-directed 401k, this case should serve as a good reminder that being aware of the prohibited transactions is of utmost importance. 

It is also worth noting that even if the IRA assets been invested under a single member self-directed IRA LLC arrangement, had the LLC assets been subjected to prohibited transactions, the court would have most likely ruled against the debtor. Simply put, while the use of an IRA LLC to gain checkbook control over your IRA funds and for liability protection is no prohibited, the use of a LLC IRA to circumvent the  IRA prohibited transactions rules is not afforded creditor protection.

To learn more about the self-directed 401k and self-directed IRA LLC, including how to invest in real estate, visit: www.mysolo401k.net or call 800-489-7571.

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