Can I Purchase a Small Business with my ROTH IRA? What are the implications of doing that?

[Guest wpfs]

I am considering buying a small business. By purchasing it with my ROTH IRA, I am told that I don't have to claim the income from the business but allow it to accumulate as a business asset.

This makes me nervous as I don't want to put my ROTH in violation of IRS code. Can anyone help guide me or point out some traps to avoid?

[Guest b2kates]

there are multiple ramifications of an IRA owning an operating business:

1. are you working the business; if so that is likely a prohibited transaction resulting in the IRA being disqualified and you have an immediate distribution

2. If you are not working the business, the business may trigger unrelated business income for the IRA under IRC section 512....

[Appleby]

See http://www.ustreas.gov/press/releases/js1073.htm for some guidance

[Guest mrsmithq]

I have been reading on how you can use your IRA to do things like buy Real Estate. Have any of you ever done it?

This site mentioned a few companies that can set this up.

http://www.howardsphd.com/myira Can you do these services yourself?

I am looking for ways to maximize my IRA possibilities...

[John G]

The website reference has some deficiencies - some important details are omitted, some statements are missing the appropriate caveats, and some of the suggestions are not advisable for the average person. It seems like that site is only partly constructed, so I would suggest you post your questions here.

Concerning real estate investing in an IRA/Roth, I will respond in general terms because you did not provide any information about your assets, experience or objectives.

The average person should not consider real estate because it is complicated and there are many restrictions. Costs/fees are likely to be higher - this isn't simple custodian work. The level of effort and time required by you is likely to be higher. Some of the tax benefits of owning real estate can not be used with an IRA/Roth. Unless you have a huge IRA, I would not suggest even investigating real estate options. If you do have a huge IRA, and feel you are knowledgeable about the full range of real estate issues, then I would consult a local accountant or tax professional to advise you.

The array of potential investments is gigantic (REITS, stocks, bonds, CDs, mutual funds, and even some options) and you don't need to look into real estate options to find investments that produce an acceptable rate of return.

[Guest mrsmithq]

So in a nutshell it is legal, but you cannot pocket the gains... I also know that from reading http://www.howardsphd.com/myira that you can by real estate but not from a family member or live in it. Can you hire yourself if you buy a business with your IRA?

[John G]

In a nutshell? Read my prior answer again because you missed my point completely. If you want to boil my response about real estate investing down to a sound bite - then the answer would be "forget about it".

Why? Too many landmines. Real estate is complicated. Higher fees. Multiple areas where you can go wrong. Very few professionals have any experience in this area, with good reason. There are many tax advantages to real estate investing that are eliminated when it is in a tax shelter. And... you don't need it because there are thousands of other investment choices that will get the job done.

I don't think much of the website you referenced. Their web pages refer to "secrets" , "little known facts", and imply that custodians/government/advisors are trying to keep people in the dark. A BIG photo of a dollar bill? Exactly what are these guys selling? I did not see any place where the owners of this website indicated who they are and their bonifides.

I would not use an anonymous website as a definitive source of information on real estate investing. Perhaps you should talk to your accountant or financial advisor.... you need someone you trust to keep you out of trouble. It looks from you posts that you are inclined to believe things because you want to believe or because you think real estate investing maybe the magic answer to your retirement planning.

I will acknowledge that there is a role for real estate, IPOs, options and other unussual investments in an IRA/Roth. But... you better be willing to spend a tremendous amount of time studying these issues using diverse sources of information. This does not come close to being a reasonable choice for maybe 98% of all the folks who own IRA/Roths. Nothing that you have said would indicate that you have the experience or background to delve into real estate investments in an IRA.

Background: I have started multiple businesses. Participated in IPOs. Bought and sold a wide array of complex options. Participated in non-IRA LLC real estate transactions. Participated in sophisticated investor and Reg D activities. I ran an investment business for three years, and have 25+ years of investing experience in common stocks, preferreds, REITs, international businesses and bonds. I have bought and sold land, real estate properties, done evaluations of the finances for others, and run a residential construction company.