Can I put stock in an IRA that is not actively traded?

[Guest SOSBORNIV]

I work for a small community bank that has stock that is not listed. My wife and I are wanting to fund out IRAs with stock this year. Can we do it, and how?

I assume we just need an institution to take custody of the IRAs?

Thanks,

Sam

[QDROphile]

You have to consider if the purchase of stock of your employer is a prohibited transaction. The determination is subject to facts and circumstances. Some would advise never to to do such a thing and some would advise that it is almost never a problem, especially if you are simply a rank and file employee.

No comment on the economic wisdom of buying employer securities, public or nonpublic.

[John G]

If I understand your question correctly, the answer is probably NO. There are at least three issues.

First, you fund an IRA using dollars. You can not transfer stock into an IRA unless it is coming from an IRA. If you put dollars into your IRA you could normally buy any stock... but you indicated that this stock is not traded which means your custodian can not buy it.

Second, you also have custodian rules which may restrict the kinds of investments you can make. For example, some custodians will not allow you to buy any stock that is not normally traded on an exchange.

Third, custodians are required to produce an asset valuation at year end. If this stock is not trading, they would have a very hard time determining a market value. This is another reason why custodians often will prohibit these kinds of holdings... or pink sheets, or regional Nazdaq, or thinly traded issues.

On your investment concept:

I invest in a lot of regional and community banks and have positions in about a dozen at this time. Over the past three years, fianancial stocks have performed extremely well. This upbeat cycle is nearing an end. It is very likely that interest rates will click higher when the economy grows stronger. Financial stocks are likely to look less attractive and some of these stocks will give up 20 to 35% in a couple of months.

If your time horizon is much longer, then just owning this stock in a taxable account may be a better idea. The LTCG rates are 15% for many people. If this holds, taking a LT gain would be less painfall in a taxable account.

I do raise the issue of too much of your economic future hinges on the success of your community bank. Two jobs + stock holdings? There are a lot of Enron and Worldcom folks (plus some of my friends in other industries) who wish they had not bet the farm on just one business. This is a high risk strategy... perhaps for high return.... but it has been my experience that the average investor becomes too enamored with his own "investment concept" and fails to understand all of the odd things that can hurt his investment. Examples: 9/11, exec at Finger Lakes regional bank committing suicide when distraught over his alumni activities, Willow Grove questionable loans, regulatory intervention, impact of local industries closing, etc.

Email me privately if you want to talk about details of your community bank.

You did not specify the size of the assets you want to invest, your current ages or if this bank has an ESOP or other method for participation in your stock. If you are invisioning a modest portion of your total assets invested in this community bank, there may be simple ways to do this.

You do not need to hit grand slams in an IRA to get excellant results. If you are just starting out on your careers, perhaps you might be better served by a S&L/banking mutual fund, or starting to assemble a portfolio of similiar companies. There is going to be lots of consolidation in the banking industry for probably the next two decades and having a position in TONE, PFS, SOV, HCBK, CFFN, NARA, EWBC and others could be a successful strategy.