In Advisory Opinion 2009-03A, the Department of Labor (the “DOL”) faced the question of whether a prohibited transaction would result, under Section 4975(c)(1)(B) of the Internal Revenue Code (the “Code”), if an IRA owner grants a brokerage firm (the “Broker”) a security interest in the assets of his non-IRA accounts held by the Broker as a requirement for establishing an IRA with the Broker. This security interest is intended to cover any indebtedness that the IRA may incur with the Broker. The IRA owner directs the investment of the IRA, so that the IRA is considered to be “self-directed”.
The DOL ruled that this arrangement would result in a prohibited transaction. A prohibited transaction involves a “plan”, such as an IRA, and a “disqualified person” , such as a fiduciary. In turn a “fiduciary” includes an IRA owner who self-directs the IRA. Section 4975(c)(1)(B) of the Code prohibits the direct or indirect lending of money or other extension of credit between an IRA (the plan) and the IRA owner (the disqualified person). The granting of a security interest in the IRA owner’s personal accounts to cover indebtedness of, or arising from, the IRA is akin to a guarantee of the payment of such indebtedness by the IRA owner and therefore constitutes the proscribed extension of credit.
The DOL also noted that, to the extent that the contemplated arrangement involves the granting by the IRA owner to the Broker of a security interest in the IRA’s assets to cover the indebtedness of the IRA owner, a prohibited transaction would likewise occur under Sections 4975(c)(1)(B), (D) and (E) of the Code. This obtains because:
— the grant of the security interest in the IRA’s assets would be an extension of credit by the IRA to the IRA owner, a disqualified person, and cause a violation of Section 4975(c)(1)(B);
— the grant of the security interest in the IRA’s assets involves a transfer or use of the IRA’s assets to or by the IRA owner, a disqualified person, and is therefore prohibited by Section 4975(c)(1)(D); and
–the arrangement allows the IRA owner, a disqualified person and a fiduciary, to deal with the income or assets of the IRA for his own benefit and account, and is therefore prohibited by Section 4975(c)(1)(E).