Guest Daniel Fisher Posted February 10, 1999 Posted February 10, 1999 An employee is terminating employment and rolling over their 401(k) account into an IRA. The Employee is also starting his own business and needs money to do this. He has been told that he can direct that his IRA custodian invest his IRA funds in his new business (I believe its stock). First of all, can he do this? I know investment options for IRAs are very wide-open (with the exception of collectibles of course). Will there be prohibited transaction problems? Second, does anyone have any ideas on how this is going to be valued? The company is not in existence yet. How would you value the stock that you are purchasing? I would appreciate any ideas or comments that you might have. Thank you.
QDROphile Posted February 10, 1999 Posted February 10, 1999 Bad idea and probable prohibited transaction and lots of people do it. The prohibited transaction occurs with the self dealing that is involved with the IRA buying the stock from a party in interest. Even if you could avoid the party in interest transaction, the transaction could be prohibited because the fiduciary (the IRA benficiary who has authority to direct investments) is realizing a personal benefit outside of the IRA by funding something that the fiduciary will use in a personal capacity -- the new company, that among other things will pay a salary to the fiduciary. The DOL has several advisory opinions on the subject.
Christine Roberts Posted October 20, 1999 Posted October 20, 1999 Is it also a PT if the company that the IRA invests in is not a start up but is a closely held company that employs the IRA beneficiary as an officer? The officer hopes to purchase, through his IRA, an infinitesimal percentage of the total shares outstanding. The company will probably go public within the next year or two. ------------------
John G Posted October 21, 1999 Posted October 21, 1999 Bad idea. Bad example of putting all of ones eggs in one basket. Start-ups fail at a very high rate.... a real "crash and burn" scenario where you can be left with ashes. Everyone thinks they are the next Bill Gates or Steve Case. I would suggest a big dose of realism. If you bet the farm and fail, you have nothing left to fall back upon. If his/her business idea is reasonable and has merit, there are other sources of funds to get started. At the small end of the scale are credit cards and family $$, at the big end angels and venture capital. To a very limited extent, you might be able to use a home equity loan. But if the idea flops you can loose your home. Cashing out to get the funds is another bad idea. That blows the tax shelter, incurs penalties, drives up your tax rate, etc. etc. I am a big fan of entrenurial activity (been there done that, been modestly succesful each time) but would not take the ultra-high risk route.
Bruce Steiner Posted October 21, 1999 Posted October 21, 1999 See James H. Swanson, 106 T.C. 76 (1996) for the taxpayer's argument that this should be OK. ------------------ Bruce Steiner, attorney (212) 986-6000 (NY office) (201) 862-1080 (NJ office) also admitted in FL Bruce Steiner, attorney (212) 986-6000 also admitted in NJ and FL
Wessex Posted October 22, 1999 Posted October 22, 1999 Ah, but did the taxpayer win? (I'm too lazy or busy to look at the case.)
Guest DavidMCohen Posted October 28, 1999 Posted October 28, 1999 There are a slew of DOL opinions on these issues, going all the way back to Mitchell rubber and probably the most recent being Robert Baird (the broker-dealer of Northwest Mutual Life). They never really answer the questions. However, this year the IRS reported (bragged may be the better word)that it blew up the IRA of an investment adviser who invested in his own pooled investment vehicle and got fees as a result. That, more than anything else, is the big No No because its not a PT subject to an excise tax, its a you don't have an IRA anymore, pay taxes on everything kind of act.
IRC401 Posted November 2, 1999 Posted November 2, 1999 If you manage to pull this off, keep in mind that you will have turned your capital gains on the IPO into ordinary income inside of the IRA, and if the company goes belly-up, there will be no deduction.
Dave Baker Posted November 2, 1999 Posted November 2, 1999 One way to tap $50,000 (maybe) - roll the money into a qualified plan sponsored by the new business. If the business is incorporated and is treated as a regular ("C") corporation, the individual ought to be able to take advantage of a plan loan provision in the plan to borrow up to the lesser of 50% of his account or $50,000. Then he could use the borrowed money to acquire stock, turning it into working capital for the company. Of course, the loan would need to be repaid over time per the usual rules that would be found in the terms of the plan.
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