corporation and roth

[Guest elderwolf]

I recently went to a financial advisor. He introduced a concept to me that is new and I want to run it by you guys and gals. Here's what he said I can do to build wealth.

1. Start a corporation or LLC

2. Fund a Roth

3. Have the Roth buy 100% of the shares in the corporation

4. start a business or buy a piece of real estate with the money from the Roth that is now in the corporation

5. profits from the business or gains from the real estate transaction can be distributed to the Roth because it's a 100% shareholder...and no taxes will be due on the gains as the Roth allows for gains in an investment ...TAX FREE.

Is this legal as long as I personally don't take a distribution?

[Guest b2kates]

a couple of questions :

1. how does the creator of the corp/llc transfer the shares to the Roth without it being a prohibited transaction

2. If a corporation how does it pass dividends tax free to roth?

3. if llc why are the earnings not subject to UBIT when passed to Roth?

4. How do you fund the Roth with enough funds to purchase the entity if it has real estate with significant value?

[Guest mjb]

The IRA owner can act as incorporator of the LLC and direct the IRA custodian to subscribe to the offering of initial shares of the the LLC with assets of the IRA as an intial offering which under the Swanson case is not a sale of stock between the IRA and the owner. Once the IRA owns the stock of the LLC all income /dividends of the LLC will pass through to the IRA on a non non taxable basis. The problem is that the IRA will need to have sufficient capital to purchase the RE without leveraging the properties and to pay for the operating costs of the RE including property taxes, insurance, accounting and legal fees, etc. The disadavantage of owning RE in a Roth IRA is that the IRA cannot take tax deductions available for RE owned by individuals and cannot take a tax loss on RE against capital gains.

[jevd]

You may wish to check out this notice before considering the suggested transaction. IRS Notice 2004-8 Regarding a listed transaction with ROTH IRAs.

Here

[Locust]

The practical problems with the Roth IRA owning the entire LLC would be to hard to overcome (plus the costs of setup would be significant). Perhaps the Roth IRA could own just a piece of the LLC, and the cash flow to maintain the ownership in the LLC would come from the annual contributions.

[John G]

OK, let me take a belated shot at this one.....

Note, #2 says fund a Roth. How? First you must qualify to contribute if you go that route and the max annual amount is not enough to give you an operating entity. If you go the conversion route, again you must qualify by having income below 100K, which suggests that the party may not have the resources to be in real estate either. Even if you already have a Roth, the resources you would need to do real estate transactions would be significant.

Besides all the risks of prohibited transactions - two major negatives are (1) overhead costs of convoluted arrangements and (2) the loss of write-offs.

What was the whole purpose of this scheme? To jump on the real estate bandwagon? If so, you are about four years too late as many areas have peaked (especially residential values).

Or, could this be one of the proposals we sometimes see where someone has a "method" for pumping extra dollars into a Roth to apparently avoid taxes. I don't think we have, to date, seen any of these that were legal.

[A Shot in the Dark]

Elderwolf:

At best, the financial advisor you met with is attempting to be more creative than the law allows. Perhaps, he may be confusing the concept of an "ERSOP" used with a "C" Corporate Tax Structure with other forms of retirement vehicles and tax entities.

[Guest mjb]

I dont think its the type of business entity which determines whether the transaction is permissible but whether the transaction avoids the prohibition against a sale, lease or exchange of assets between the IRA owner and the IRA which is accomplished by subscription of the IRA to an initial offerring of stock or other ownership interest. IRA Custodians prefer to have some legal entity owning RE because it mitigates/ eliminates liability of the custodian for claims against the property because of negligence, etc. since the custodian only owns the shares of stock, not the RE.