Can one invest in startups using a Roth?

[Guest sambapati]

Would like to know what one can invest Roth funds with and the potential for delaying capital gains taxes?

[Dave Baker]

Basically you just have to avoid causing the IRA to engage in a "prohibited transaction" -- can't purchase the investment from the IRA owner, a company controlled by the IRA owner, etc. -- the tax code doesn't really prohibit any particular kind of investment at all (other than so-called "collectibles"). So a security issued by a start-up company generally would be fine.

Sometimes prohibited transaction problems crop up when the IRA owner is involved in starting the company that issues the securities, or will be an employee of that company. Generally it's OK for the IRA owner to invest in the company at the same time that the IRA makes the investment, or even to serve as a director of the company. One of the prohibited transactions, you see, is where an IRA owner "uses" the IRA's investments for his or her own benefit ... it's a squishy concept.

[Guest John R Grossmann]

At some brokerages, you can ask to participate in an IPO and hope to get shares as part of their allocation system. A very small number of brokerages will allow you to purchase shares on an "outside" IPO if they are satisfied with the custodial handling. Pink sheet and small cap IPOs are unlikely to be allowed. The size of your account, total assets, investment experience and length of time with the brokerage may factor into the options a custodian may allow. You may need to speak to more than one person at a brokerage to get a clarification of their policies.

[Guest John R Grossmann]

Delaying capital gains