Closely held stock in a ROTH IRA
This seems like a great planning opportunity but will it work?
Small business owner plunks $5000 into a Traditional IRA – nondeductible. Subsequently converts to a ROTH in year 2010. Then buys stock in corporation. Stock eventually sold for 10x or 20x…
The problem is this: under what circumstance would the IRA be eligible to buy stock in the corporation? The IRA owner can only contribute cash to an IRA. Does the conferrence of the right to buy stock constitute a prohibited transaction? Secondly does the purchase of the stock at current fair value create a concern about the assigned value? Perhaps under exam, the IRA owner pays $5000 for stock that is later determined to be worth $7000 -it was thought to be an arms length transaction but turns out that there was a $5000 purchase and another $2000 treated as a contribution. Any comments and is there some place to do some reading on this subject?
Thanks,
Jim M
Permalink Submitted by mk foss on Sat, 2008-11-29 23:40
Purchasing the stock from a related party would be a prohibited transaction. Having an IRA that benefited the owner would be a prohibited transaction. IRS relaeased Notice 2004-8 to curb what they term “Abusive Roth IRA Transactions.” The specific example has to do with owning stock in the Roth owner’s corporation.
You may see references to the Swanson case that indicates IRAs can invest in business start ups. The case didn’t condone it just looked at the prohbited transaction rules.
The Department of Labor can grant exemptions from prohibited transactions and advisory opinions. It would be difficult to recommend this strategy without one.
Permalink Submitted by JAMES MAGNO on Sun, 2008-11-30 09:47
MGT4CPA-
Thanks for pointing me in the right direction. I will follow up on this info. At first impression, it’s the related party rules that create the obstacle – however that would not be true with an ESOP and perhaps not true of a 401k plan – any ideas about what specific rules come into play to allow holding corp stock in these instance – I will look at the rules on Monday.
Thanks for your feedback it was very helpful to bounce the ideas around.
Jim