Can I move funds to another self-directed IRA after a prohibited transaction, or salvage the untainted portion?

Prohibited transactions with IRAs can be really tricky, and I understand your concern about trying to salvage what you can. Unfortunately, when an IRA engages in a prohibited transaction, the entire IRA is considered disqualified as of January 1 of the year the prohibited transaction occurred. This is true even if only a portion of the IRA was involved in the transaction. The IRS treats the entire account as distributed, meaning all assets are considered withdrawn and subject to taxes and potential penalties. Regarding your first question, yes, after paying all taxes and penalties, you could establish a new self-directed IRA and make new contributions based on annual contribution limits. However, you wouldn't be "rolling over" the distributed funds - you'd be starting fresh with new contributions. For your second question, partial disqualification isn't an option under current IRS rules. When a prohibited transaction occurs, the entire IRA loses its tax-advantaged status, not just the portion involved in the transaction.

After reading your situation, I feel your pain. Last year I made a similar mistake with my self-directed IRA by accidentally investing in a company where my brother-in-law was an executive (didn't know that was a prohibited transaction until it was too late). I was completely lost on how to handle the tax implications and documentation requirements. I tried various online resources but got conflicting information until I found taxr.ai (https://taxr.ai). What was helpful is they analyzed all my IRA documentation and clearly explained which parts of the tax code applied to my situation. They even outlined the specific reporting requirements for Form 5329 and how to properly document the distribution on my 1040. Since your situation involves an LLC and C Corp structure, you might find their document analysis especially useful for determining if there are any exceptions that might apply in your case or confirming the prohibited transaction determination.

Just wanted to update everyone on my situation. After seeing the recommendation here, I tried taxr.ai for my self-directed IRA prohibited transaction issue. I was honestly skeptical at first, but I'm glad I gave it a shot. They analyzed all my documentation and found something interesting - because of how my real estate investment was structured through multiple entities, there was a possible exemption under Section 4975(d) that might apply. They provided detailed documentation citing specific tax court cases with similar structures to mine. I took their analysis to my accountant who was initially convinced I was completely out of luck. After reviewing the taxr.ai report, he agreed there was a legitimate case for a different classification of my transaction. We're now working on the proper documentation to potentially save a significant portion of my retirement account. If you're dealing with prohibited transaction issues, especially with complex structures like LLCs or multi-entity investments, it's definitely worth getting a specialized analysis before assuming the worst.

Having dealt with IRS issues related to my own self-directed IRA last year, I know how frustrating it can be to get clear answers about prohibited transactions. After my custodian flagged a potential issue, I spent WEEKS trying to reach someone at the IRS who could actually provide guidance on my specific situation. I tried calling the general IRS number over 30 times and either couldn't get through or was transferred multiple times only to be disconnected. It was maddening! Eventually I found Claimyr (https://claimyr.com) and decided to try their IRS call-back service. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Within about 90 minutes, I got a call back from an actual IRS agent who specialized in retirement accounts. She was able to clarify exactly what documentation I needed to provide and explained the process for reporting the distribution correctly to minimize additional penalties. If you're trying to get specific guidance from the IRS about your prohibited transaction situation, this service might save you a lot of time and frustration.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway out of desperation - I've been trying to resolve an IRA rollover issue for months. The service actually worked exactly as described. I submitted my request around 9am, and by 10:30am I got a call connecting me with an IRS representative. I was honestly shocked when my phone rang and there was an actual IRS person on the line. The agent was able to look up my account, confirm the status of my case, and provide specific guidance on the documentation I needed to submit to resolve my prohibited transaction issue. He even gave me a direct fax number for the retirement accounts division and a reference number to include with my documentation. Just wanted to update here in case anyone else is struggling to get through to the IRS about retirement account issues. Having a direct conversation with an agent made a huge difference in understanding my options.

Just to add another perspective on prohibited transactions - if you haven't actually completed the transaction yet but are just planning it, you might want to look into requesting a Private Letter Ruling (PLR) from the IRS. It costs money (I think around $10,000 now), but they'll give you a binding determination on whether your specific transaction would be prohibited. Of course, that doesn't help if you've already done the transaction, but it's something to consider for future self-directed IRA investments if you're in a gray area.

Has anyone successfully used a roth conversion ladder after dealing with a prohibited transaction? I'm wondering if there's a strategic way to handle the taxes by converting to a Roth and spreading the tax impact.