General Legal Requirements for IRAs
A. IRA’s are generally not subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). DOL Reg. § 2510.3-2(d).
1. Therefore, ERISA’s fiduciary rules, including the duties of diversification and prudence do not apply to IRA’s.
2. However, separate from ERISA’s fiduciary rules, both ERISA and the Internal Revenue Code contain nearly identical sets of prophylactic rules called “prohibited transaction rules.” See ERISA § 406 and IRC § 4975.
(1) IRA’s are subject to the Internal Revenue Code’s prohibited transaction rules. IRC §4975(e)(1)(B).
(2) Because ERISA’s and the Code’s prohibited transaction rules are virtually identical, Presidential Reorganization Plan No. 4 of 1978 transferred the Secretary of the Treasury’s authority to interpret IRC § 4975 to the Secretary of Labor. Therefore, the regulatory guidance with respect to prohibited transactions, including specifically regarding potential prohibited transactions involving IRA’s, is generated by the U.S. Department of Labor (the “DOL”), specifically the Pension and Welfare Benefits Administration (“PWBA”) within the DOL, not Treasury.
B. Other than the prohibited transaction rules and the rules in the Internal Revenue Code regarding the taxation of the income of an IRA (e.g., UBTI, as discussed below) and distributions from an IRA (i.e., IRC § 72 and the minimum distribution rules of IRC § 401(a)(9) as imposed through IRC § 408(a)(6)), including the labyrinth of rules contained in the Internal Revenue Code concerning limitations on, and the deductibility of, IRA contributions, the only substantive legal rules imposed on IRA’s are those of IRC § 408(a)(1) through (5) and the rules of state trust and banking laws.
1. IRC § 408(a)(1) through (5) impose the following substantive requirements on IRA’s:
a. Generally, contributions to an IRA must be made in cash. IRC § 408(a)(l).
b. A bank, credit union, company operating under the direct supervision of the department of banking in their respective state, (i.e. a state chartered trust company), a company with an approval letter from the Commissioner of the IRS, or other approved IRA custodian (e.g., a securities broker dealer) must have custody of the IRA’s assets. IRC § 408(a)(2) and IRC § 408(n).
c. IRA’s may not invest in life insurance. IRC § 408(a)(3).
d. The IRA owner’s interest must be nonforfeitable (i.e., it must be fully vested). IRC § 408(a)(4).
e. The assets of one IRA may not be commingled with any other assets, except in a group trust. IRC § 408(a)(5).
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Copyright 2005, Luke Bailey, Partner Strasburger & Price, LLP Dallas, TX from Selected Federal Income Tax and Other Legal Issues of Self-Directed IRA’s by Luke Bailey, Partner Strasburger & Price, LLP Dallas, TX Contact: (214) 651-4572 or luke.bailey@strasburger.com
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