Roth Investment in Sub S Corp

[Guest David Graves]

I am about to make an investment in a Sub S. Corp. The investment will consist of stock and a loan to the Corp.

Can my Roth IRA own the stock in this new Sub S. Corp? I will not be the majority stockholder. If this startup succeeds, I could be employed by the Sub S. Corp. in 2-3 years.

Thanks for your help.

[Guest Martin Silfen]

I see two problems with this situation. First, generally only individuals may be Sub S shareholders. There is a special exception allowing qualified plans as Sub S shareholders, but it is not broad enough to allow IRAs as Sub S shareholders. Second, using your IRA assets to invest in a corporation that, if successful, will employ you is a prohibited transaction. It is the use of plan assets for the benefit of a disqualified person.

[Guest David Graves]

Mr. Silfen

Thanks for your response.

An estate attorney said it was now legal for my Private Foundation to receive as a contribution and retain the ownership in one of my Sub S Corps. It is a good way to donate pretax dollars.

I was hoping the rules had changed on IRA's.

If you would be so kind to answer one follow up question on part 2 of your response.

Am I a disqualified person because I am a stockholder or because I could become an employee.

Thanks