Legal Blog

The Weekly Scenario: IRA & Stocks

Question: Is my self-directed Individual Retirement Account (IRA) permitted to acquire stock in my newly formed corporation?


Answer: Yes, an IRA may own stock (majority or minority) in a business.

However, there are a number of IRA traps for the unwary.

1. Payment of compensation to corporate officers. Any compensation paid to the IRA owner is deemed to be a so-called ‘prohibited transaction’ which will cause a termination of the IRA. Once that occurs, the individual will be deemed to have received a distribution of an amount equal to the fair market value of the assets in the IRA and all the tax will be due. If the IRA owner is under 59 ½, there will also be a 10% additional penalty on the early distribution.

2. Providing direct or indirect services to the IRA is also prohibited. So for example, if the business is in real estate investments inside the IRA, providing services to the IRA owned properties must be avoided.

3. A guarantee of any loan for the business will disqualify the IRA as well. So if credit is extended from a third party for example, this will result in a prohibited transaction and cause the IRA to lose its status. The IRA owner will be deemed to have received a distribution of the IRA on the day the loan guarantee was made and tax will be due.

Comment: As noted above, there are a number of traps here. It is advisable to seek advice from counsel before using an IRA to hold or structure business assets.

As always, if you have any questions or would like to learn more, please let me know.

ABOUT STEVE SHANE

Steven E. Shane

Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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