Can your IRA invest in Your Business? | Frank Selden Law

Can your IRA invest in Your Business?

You may not directly invest your IRA into your business. However, you may invest qualified funds into your own business through a 401K plan if the plan allows for a "qualified employee securities" choice.  The IRS refers to these plans as a ROBS setup, because they are commonly used by people who want to fund a new or existing business with their qualified funds. 401K ROBS PROS creates the best ROBS setup in the industry. At least in my opinion. I started the company.

Can we just skip that process and invest straight from an IRA into your own business? No. 100% no. I sometimes help people find a way to achieve their objectives through creative (and legal, just not well known) methods. I try to say yes. To this question, however, the answer is an unequivocal no. I will say it later just in case you missed it.

But Why Not?

Have you ever heard this question from curious young children? I did not get angry with my kids for asking this, even the 100th time. I want them to be curious. That question is always welcome in my legal practice as well. I want clients to understand. The Internal Revenue Code (IRC) prohibits IRAs from transactions with disqualified persons. Disqualified persons (DP) includes you, specified family members, entities you control, and several less common individuals and entities. A business you control is a DP. If you work for a large corporation but do not own a majority of the stock or sit on the board of directors or do not control what the corporation does with its funds, then your employer is likely not a DP and you may invest your IRA funds.

Do DP rules apply to 401(k) Plans?

Yes, they do! However, there is an exception to that rule for “qualified employer securities” which is the basis of the rollover business startup method. Some people, hearing that one may invest qualified funds into their own company, but not knowing the method, used their IRA funds and later faced the penalties for IRA disqualification. See this post about Peek v. Commissioner. “I thought we were creating a ROBS” is not a valid defense for using IRA funds.

Where May I Invest my IRA funds?

The Internal Revue Code code details what IRAs may not invest in, rather than where they may. Essentially, no life insurance contracts or collectibles. Those are the only prohibited investments. The code also specifies prohibited transactions, one of which is any transaction involving a DP. Yes, you may invest in a corporation for stock. No, you may not invest in your own corporation for stock because your corporation is a DP. See the difference? Understanding the difference, and acting accordingly, could save you hundreds of thousands of dollars in taxes and penalties.

Bottom Line

When in doubt, get proper advice before moving forward with a self-directed IRA or ROBS. Call me at 206-550-9777.

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