Self dealing limitations on Roth IRA's

[John G]

I can not address the issue of when the deal is too close to be allowed, or the specific IRS requirements.

However, it is possible to buy a private placement and some other unussual investments in an IRA or Roth. For example, when EWBC (now a publicly traded company) had a private placement in 1998, a number of initial investors used IRA accounts. You had to be a qualified/sophisticated investor to participate, but to my knowledge none of these investors had any relationship with the corp. The firm went public six months later. (EWBC was a California thrift owned by an Indonesian family)

Besides IRS rules, one of the keys is finding a custodian that will allow some of these transactions. In the example I cited, a broker who cleared via Bear Stearns was one of the participants. I got an email a few weeks back that said a Denver broker/custodian specializes in unussual deals, but I have no direct knowledge of them. Clearly conventional banks and brokers will often say no, even if it would meet IRS requirements. So, you need to ask around to see who will consider your idea.

Dad should understand that this proposed stock will be not be liquid.

[Guest pbruce]

How does the IRS view Roth IRA investments between close family relations, father/son for example. If dad wants to invest in a company that the son has a principal part of and is a private placement, ie not a publically traded stock, what constitutes a sufficient arms length investment to qualify as a Roth ?

Does the % of the total in the company have to be a small % ? Does the son have to have others who own in the company and who make decisions in the company ie there are others who are just as important principals that effect company outcome and decisions. Is the whole area so fuzzy that it is on a case by case basis with the IRS ? Any examples would be appreciated.

[Michael Devault]

I'm not sure you can do what you want, if I understand your question correctly. In order to qualify as a Roth IRA, a trust or custodial account has to be established which meets the IRS' requirements. A trustee or custodian has to be established, but not just anyone can serve in that capacity: They have to be a bank, insurance company, brokerage firm, etc., or approved by the Treasury Dept. Once established, the you make your contribution to the trustee or custodian, who in turn purchases the Roth IRA.

It this situation, it would seem difficult at best to have stock in a company that is not publicly traded to be part of a Roth IRA. It would require lots of effort, though. Maybe more than it's worth?!

Hope this if of some benefit to you. Good luck!

[Guest pbruce]

Thanks for your replies. I believe the 2nd one is refering to trust company of America in Englewood Colo. They do special private placements. Since I wrote my original question I have received word that their (TCA's) compliance dept has turned me down on what I want to do because of the family relationship. I believe that this is a very conservative interpertation of the IRS rules (since both I and the co that I want to invest in are willing to state in writing that I have absolutely no connection to the co other than a family relationship,have no say in policy, daily operation etc) and am continuing to search for a custodian to do this. I guess my question now would be is anyone aware of other companies like TCA ? If they are the only one who does this then my only other option is to simply invest with unscheltered funds.

[John G]

Use the email in my profile and send me a note. I will respond with another possible custodian.

[Bruce Steiner]

The prohibited transaction rules can be quite complicated. You should consult comptent tax/estates counsel.

There are several trust companies which will permit private investments in IRAs.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL