Self-directed IRA & C-Corp Blocker Structure: Avoiding UBTI While Preventing Prohibited Transactions

Thanks for the explanation, but I'm still confused about one thing - if I'm the one who sets up and manages the C-Corp that my SDIRA owns, wouldn't that count as providing services to an entity owned by my IRA? How does that work without violating the rules? Also, if my SDIRA owns the C-Corp and then the C-Corp invests in something I personally directed it to invest in, isn't that still me indirectly controlling the investment?

You've hit on the critical point. You personally cannot manage the C-Corp that your IRA owns - that would indeed be providing services to an IRA-owned entity, which is a prohibited transaction. The C-Corp needs its own independent management that makes investment decisions at arm's length from you. Regarding control, this is where the structure gets nuanced. Your IRA custodian makes the investment in the C-Corp based on your direction, but once that investment is made, you should not be directly controlling the C-Corp's subsequent investments. Typically, the C-Corp would have independent officers and directors making those decisions. Some people use corporate trustees or hire third-party managers for this purpose.

Does taxr.ai actually have specialists who understand SDIRA structures specifically? I've been burned before by general tax advisors who don't really get the nuances of self-directed IRAs and prohibited transactions.

How exactly does their service work? Do you just upload your incorporation docs and investment plans and they tell you if there are problems? Wondering if they can help me fix a potentially problematic structure I already set up last year...

They absolutely have specialists who understand SDIRA structures - that's what impressed me most. Their team caught issues that two different "SDIRA specialists" missed regarding indirect benefits and control problems. For how it works, you upload your documents (operating agreements, incorporation papers, investment prospectuses, etc.) and explain your planned structure. They analyze everything and provide a detailed report identifying potential prohibited transaction risks with explanations of why they're problematic and how to fix them. In my case, they identified that my original management structure would have created an indirect benefit situation since I was going to be too involved in the C-Corp's operations.

Wait, how does that even work? The IRS phone system is completely broken - I literally tried for days to get through about my SDIRA question. Are you saying this service somehow jumps the queue?

Sounds like a scam honestly. I don't believe anyone can magically get through to the IRS when their phone lines are jammed. And even if you did get through, what are the chances you'd actually reach someone who understands the complexities of SDIRA structures and UBTI?

It's not about "jumping the queue" - they use technology that continuously redials and navigates the IRS phone tree until it gets through, then calls you when there's a live agent. Basically does the waiting for you. I was skeptical too, but you only pay if they actually connect you. Regarding getting someone knowledgeable - that's a fair concern. I specifically requested an agent from the Employee Plans division when connected, and while the first person wasn't familiar with SDIRA blocker structures, they transferred me to a technical specialist who was. You're right that not every IRS agent will understand these complex structures, but getting through is the first crucial step.

That's really helpful - I hadn't considered adding an independent director. Do you know if there are specific qualifications this person needs to have? And is it enough to just have them on paper, or do they need to be actively involved in investment decisions?

The independent director should have genuine decision-making authority - not just be a name on paper. This is about substance over form. They should have relevant business or investment experience and be able to demonstrate they're making independent decisions. The person absolutely cannot be a disqualified person (like your spouse, ancestor, descendant, or certain business partners). Documentation of their involvement is crucial - meeting minutes, communications about investment decisions, etc. You want a clear paper trail showing they're not just a rubber stamp for your wishes.

I did this analysis last year. It really depends on the size of your investments and the type of activity. For my real estate investments that would have generated significant UBTI (around $85,000 annually), the C-Corp blocker saved about 15% overall even after accounting for corporate taxes. The key was structuring the C-Corp to minimize dividends back to the IRA and instead focus on long-term growth that would eventually be realized when selling the entire C-Corp. Also made sure to keep corporate expenses reasonable to maximize the tax efficiency.

Thanks for sharing your experience! That 15% savings is substantial. Were there any particular strategies you used to minimize the dividends while still getting value from the investments? I'm concerned about having money trapped in the C-Corp structure.

The strategy I used was to have the C-Corp reinvest most of its profits back into additional investments rather than distributing dividends. This keeps the money working and growing within the corporate structure while avoiding immediate double taxation. When I eventually want to access the value, my SDIRA can sell its shares in the C-Corp (either to another party or through a liquidation), which would be treated as a capital gain at the IRA level - meaning no immediate tax since it's in the retirement account. The other approach some people use is having the C-Corp make loans back to the IRA for other investments, though you have to be very careful about the terms to avoid prohibited transaction issues. I kept it simple and just focused on growth within the corporate structure.

This is exactly the kind of practical insight I was hoping to find! The compliance costs you mentioned are something I hadn't fully considered. When you say $3-5K annually, does that include the custodian fees as well, or is that just the corporate maintenance costs? I'm particularly interested in your point about custodian selection. Are there specific custodians you'd recommend that are more experienced with these complex structures? I've been working with a basic SDIRA provider, but I'm starting to think I might need to switch to someone who really understands the nuances of C-Corp blocker arrangements. Your suggestion about starting with a smaller test investment is brilliant. I was considering jumping in with a significant portion of my retirement funds, but testing the waters first makes so much more sense. Better to learn the operational complexities with lower stakes.