Photo credit: jb
Once again in the category of terrible things you can attempt to do with your IRA, there is the concept of a “cross loan” from your IRA to another, unrelated party.
You know from previous articles that it’s not allowable to transact business with disqualified persons. Therefore, you can not take a loan from your IRA to finance your business, or your brother’s business (among others). But what if you came to an agreement with someone else not related to you in any way, who is not a disqualified person, to loan money from your IRA to finance her business, while she loans money from her IRA to finance yours? Whatever could go wrong with this arrangement?
While the technical provision of transacting business with a disqualified person has been avoided, there’s a small problem with the plan. There is another test that prohibits the IRA owner from receiving an indirect benefit from a transaction. In the case of the cross loans, there is an indirect benefit in that one loan facilitates the other – and the IRS would figger this out before you could say “Bob’s your uncle”.
Entering into such a series of loans would most likely result in both IRAs being disqualified and taxable immediately. It should be noted that this would also be considered a prohibited transaction if the second loan was from another source besides an IRA, since the indirect benefit would still have come into play.
Sterling Raskie, MSFS, CFP®, ChFC®
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