Can an IRA Hold Closely Held Stock?
Original post by Leslie McClintock of Demand Media
One of the advantages of the individual retirement arrangement (IRA) is the tremendous flexibility it gives to the owner in terms of what investment options they may select, compared with other retirement vehicles, such as defined benefit pension plans, 403b plans, annuities and 401k plans. You can, in fact, own stock in a closely-held business within an IRA plan. But use caution: One wrong move and you can unravel your whole IRA.
First, let's discuss what you can not do: You cannot borrow from your IRA, nor pledge your IRA assets as security for a loan. You cannot lend money from your IRA to any member of your family, nor any business you control. You also cannot take your IRA and invest it in jewelry, gems, wines or other alcoholic beverages, or many kinds of precious metal investments.
You can, however, liberate your IRA from the world of stocks, bonds and mutual funds and use it to invest in something you control, such as your own real estate holding company, farm, ranch or other closely-held business. However, you must control and operate this business using only money from the IRA. You cannot commingle IRA and non-IRA assets in the business, and you cannot take money out of the IRA without paying income tax and penalties. If you engage in a prohibited transaction, you may wind up disallowing the entire IRA and facing taxes and penalties on the entire asset.
Generally, the process of establishing a self-directed IRA works like this: You establish a corporation or limited liability company to hold your IRA assets. You have a lawyer draw up operating documents naming you as the manager of the company. You then open up a business checking account, separate from your own personal funds. Then direct your IRA trustee to transfer the funds directly to that business checking account. Use your IRA to purchase or establish your own business.
Use extreme caution when using IRA assets to purchase shares in a corporation you don't control. If you have only a partial interest in a corporation, and the corporation issues a dividend to you, and you receive it, you may wind up with a tax penalty on the dividend, since it could be construed as having received a distribution from your IRA. You only have 60 days to contribute that sum back into an IRA, and if your income is too high, you may not even qualify for a deductible contribution. If you own a controlling interest in the company, however, you can control when and how the company issues dividends to shareholders.
- SelfDirectedIRA.org: Self Directed IRA
- SelfDirectedIRA.org: How It Works
- Self-DirectedIRA.org: Prohibited Transactions
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.