Acquiring Private Held Stock with ROTH IRA Funds
I am retired and have a ROTH IRA. I am also under 591/2 and have no intentions of taking any momey out of the ROTH, until I am of age.
I have an opportunity to invest in a Private Company. I want to do this through my ROTH IRA. My Roth IRA would receive an annual K1/Distributable Income.
My intent was to have the funds transferred from my [self directed] ROTH IRA [which is currently held in Scottrade, to the company, LLC. Any distributable income was to be reinvested in the Company until such time as it was sold, became a public traded company, or I reached 591/2. Should it be sold prior to age 591/2 then the funds would be transfered either to a ROTH IRA savings account or back to Scottstrade. I should tell you the LLC manufactures and sells a specific product. Also, if for some reason I would have to pay taxes then I would have to use the distributable income to do so.
I want to do this but I want to do this will the least amount of tax consequences as I am on a fixed income. I have two different financial instutions telling me two different stories and I am concerned about doing things correctly. Don’t think I’d look good in stripes [smile].
If you could please tell me if this can be done and if so how I should do this I would greatly appreciate it.
Permalink Submitted by Alan Spross on Tue, 2010-05-18 00:19
To undertake this you should locate a self directed IRA custodian who handles non traditional assets. I do not think that Scottrade handles such assets. The custodian can explain the prohibited transaction rules which you need to avoid at all costs. The business cannot be owned by a disqualified person as defined in the tax code, or the IRA can be disqualified for self dealing. There is also an annual year end valuation requirement for all IRAs, and in some cases an appraisal will be required annually. You also need to avoid the unrelated business taxable income situation, which requires a separate return for any such income over $1,000 with taxes paid by your Roth.
But if you avoid the pitfalls, once your Roth IRA becomes qualified after 5 years and you reach 59.5, all distributions will be tax free. And there will be no RMDs since it is a Roth IRA.
Permalink Submitted by Patricia Livingston on Tue, 2010-05-18 02:57
I contacted 2 custodians. One told me they would set up my LLC and I would open a checking acount in the name of my LLC. Then my LLC would write the check to the company. The stocks would be in the name of my LLC. The stocks would be sent to me in the name of my LLC. They hold nothing but would be considerd my custodian and I would pay then an annual fee.
The other custodian said transfer the funds and they’d send a check to the company in the name of my ROTH.
Then I contacted 4 separate financial advisors. Two told me I could not do it. One told me to simply have my funds transferred from Scottrade to the LLC that I wanted to purchase shares/stock in the company. If I wanted to open an LLC for my ROTH that was up to me, wans’t sure it was necessary. Since I wasn’t taking possession of the funds and the shares would be titled in the ROTH IRA I should be okay. Just make sure my acountant/CPA files a 990T at the end of the year. The last one told me it was over his head and sent me to you.
This is why I’m confused.
Permalink Submitted by Jose Morales on Tue, 2010-05-18 15:52
You will have much better luck with assistance from a company like [url]http://www.penscotrust.com/%5B/url%5D. There is no way any of us will have enough information about this situation to be able to give you any kind of definitive answer.