If you’re starting a business, you’re pretty confident (perhaps rightly or wrongly) that the business is going to grow and become more valuable. Wouldn’t it be great if that growth could go on inside your Roth IRA and be tax free? It sure would. And, maybe it could happen, but the rules are pretty complex.
If you’ve already started a business, then getting the business inside a Roth IRA is almost impossible. In most cases, I wouldn’t recommend trying it. This is because in most cases moving the business inside an IRA will be a Prohibited Transaction and disqualify your entire IRA. And trust me this is a bad thing. The entire contents of your IRA will be emptied out as of 1 Jan of the year of the prohibited transactions and subject to taxes and penalty. And if you have earnings after the prohibited transactions, those earnings will all be taxed as if they occurred outside of the IRA.
There are two limited scenarios where you might be able to get an existing business inside an IRA, if you and/or your family members own less than 50% of the company.
- Your IRA buys interest in the company from someone other than you or your family members
- Your IRA buys interest in the company from the company itself (new issue shares)
Just to be clear, you have to buy the shares at Fair Market Value (FMV)
If you haven’t started your business, there is kind of a weird situation. Since the company hasn’t started yet, you don’t own it. Since you don’t own it you and/or the business aren’t disqualified persons (those who can’t buy/sell shares in the company). So, prior to starting operations, your IRA can purchase up to 100% of the company. Pretty cool.
But There is More
Your troubles aren’t over yet. An IRA owner can’t receive benefits from an IRA. This is considered self-dealing.
As an example, you can’t receive compensation from a business owned by an IRA where you exercise control over the business. In other words, if you’re the boss you can’t get paid by a business owned by your IRA. If your IRA owns a small portion of the business and you don’t exercise control, this usually isn’t an issue.
And…you can’t necessarily work for free either. If you’re working in the business (i.e., running day to day operations), even without pay, it is considered “impermissible furnishing of services” and a Prohibited Transactions. You can, however, work on the business (without pay) and not trigger a Prohibited Transaction. As examples, you can hire managers to run the business, sign contracts for the business and make investment decisions.
Tread Very Carefully
There you have it. You can, under certain circumstances, own your business inside an IRA. Would I try it? I’m not sure I would.
Running a Business is a Little Different Than Being in a Business
I think most of us agree being a business owner is a lot different than being a servicemember. Your combined military and business owner finances are different than someone who has been a civilian their whole life. We think you should get your advice from someone who understands your military and veteran financial benefits and business owner finances too. If you'd like to chat, give us a call or click below to set up a free initial consultation.
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