Using IRA investments to reduce income taxes
I live in a state that has very high income tax rates. Fortunately, my state also has a program that will allow me to claim a tax credit (not a deduction) against my state income taxes if I invest in a qualified start-up business or an expanding business that is located in my state. The credit is substantial. It can be as high as 60%. For example, if I invest personally $100,000 in a qualified business, I will save as much as $60,000 in state income taxes. Any credit that I cannot use in one year can be carried forward to future years, up to a maximum of 15 years. I have learned that if my IRA instead invests in the qualified business, my state will still allow me personally to take the credit against my state income taxes. My question is whether my taking a personal tax credit for an investmnet made by my IRA would be a prohibited transaction or would run afoul of some other IRA restriction. Anyone have any thoughts on this?
Permalink Submitted by Alan Spross on Thu, 2009-07-09 01:17
This would not be a prohibited transaction unless you or other disqualified person owned 50% or more of the corporation. The tax credit itself is immaterial with respect to what would be a prohibited transaction.
Of course, an unrelated concern is that you should check into the required holding period for the investment so that there is no recapture of the tax credit. In addition, if you are subject to RMDs, the IRA custodian needs to be able to report a year end value of the entire account including the value of your holding in this business.
Permalink Submitted by James Houle on Thu, 2009-07-09 17:51
alan-onirs, are you sure of your answer? My Web research indicates that tax code section 4975(c) (1) defines a prohibited transaction to include “any direct or indirect . . . dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account.” Seems investing my IRA assets so that I can save state income taxes could fall within that definition. I’d like to think that it will not, but I cannot find that the IRS or DOL has ever looked at a situation like this. If it’s not a porhibited transacation, what a potential windfall! I can personally save 60% in state taxes for my IRA’s investment, and, if the investment is successful, also shelter the investment gain in my IRA.