facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Retired Military Finances 401: Can My IRA Own My Business? Thumbnail

Retired Military Finances 401: Can My IRA Own My Business?

Retirement Funding Taxes Managing Your Finances

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.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 301: Business Formation

Retired Military Finances 401: MEPs? PEPs? A Business Owner's Guide

Retired Military Finances 201: 6 Questions to Ask When Hiring a CPA for Your Business

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.