Hi, thank you for bringing your question to Google Answers, I believe
I can provide the information you need.
If you are talking about withdrawing money from your IRA in order to
buy stock, then obviously this will involve penalties and tax
consequences unless you follow the age and amount rules set forth by
the IRS for IRA withdrawals. Tax consequences depend on your
particular tax and income situation.
What you are taking out of an IRA is simply money; it doesn't matter
what other investment you purchase with that money after withdrawal
(unless you roll it over into another IRA) - that is cut and dried IRS
regulations as are any tax consequences - no one can tell you exactly
what will happen without specifics about your situation including age
and the amount you wish to withdraw.
Tables and rules for figuring how much money you can withdraw from
your IRA at any time are provided in IRS publication 590.
http://www.irs.gov/pub/irs-pdf/p590.pdf
use that publication to calculate any penalties you may incur.
However, buying privately held stock and holding it within your IRA is
almost certainly perfectly OK, at least as far as the IRS is
concerned.
There is one big problem with your situation that probably makes the
entire question of buying the stock within your IRA moot - each IRA
must be administered by some trustee and every trustee has their own
restrictions which don?t have legal force outside their own operations
but which they can apply to any account they administer.
For example, many people think that you can?t have any sort of real
estate investment in an IRA simply because many trustees do not permit
it.
Actually the IRS does NOT prohibit real estate investments, in fact,
the agency specifically states that this is NOT a prohibited asset
class, still, many IRA trustees do not permit this and if you have an
IRA with one of them then you can?t invest in real estate even though
it is perfectly OK with the IRS.
Generally trustees will limit investments to highly liquid asset
classes such as listed stocks and bonds. Their IRA management fees
are generally very small and they won't want any complications such as
trying to determine the price of something - for example, a privately
held stock if the sole stockholder is deceased or no longer runs the
associated business beause he or she is retired.
Please bear in mind that you really need to check with your particular
trustee to see if any investment you contemplate is acceptable to the
trustee ? you can always move your account elsewhere if there is a
problem but what you want to invest in (privately held stock) isn?t
actually prohibited by the IRS according to the governing
publications. You should also remember that IRS publications are
general statements of rules and guidelines, complex questions may
require additional research by qualified professionals.
The only real category of IRA investments which IS prohibited by the
IRS is collectibles such as art, rugs, stamps, antiques, gems, etc.
http://www.irs.gov/retirement/article/0,,id=111413,00.html#6
The governing publication is IRS Publication 590, a 100 page document.
http://www.irs.gov/pub/irs-pdf/p590.pdf
Page 8 of the document may have some vague application to your
question but would require checking with the IRS or a CPA.
The point in question would be that ?Assets in your account cannot be
combined with other property, except in a common trust fund or common
investment fund.? I believe this is only interpreted as referring to
the purchase of a mutual fund or company stock which may have various
holdings that may violate IRS rules. For example, even collectibles
may not be prohibited if you invest in a mutual fund of auction houses
or art galleries which, in turn, probably hold collectible assets.
Many corporations have art carried on their books as part of their
assets.
Depending on how the privately held corporation is setup I suppose
this could pose a problem but it is unlikely.
Page 39 addresses what specific acts can result in penalties or
additional taxes under IRS regulations but bear in mind that there
are hundreds of thousands of pages of actual rules, regulations, and
tax court decisions, these are simply the general rules in lay terms.
>Investing in collectibles
>Making excess contributions
>Taking early distributions
>Allowing excess amounts to accumulate (there are required
distributions after a certain age.)
Obviously there is only one of those which has anything to do with
what asset classes you are permitted to hold in an IRA.
There are 28 search results for searching on these terms at the IRS site
IRA Privately Held Stock
http://search.irs.gov/web/query.html?search.x=7&search.y=10&search=search&tx0=IRA+Privately+held+stock&fl0=&tx1=&fl1=&tx2=&fl2=&tx3=&fl3=&op0=%2B&ty0=w&op1=&ty1=p&op2=&ty2=w&op3=-&ty3=w&sac=1&ff=0&charset=utf-8&chkbox0=1&chkbox1=0&chkbox2=0&chkbox3=0&chkbox4=0&chkbox5=0&chkbox6=0&chkbox7=0&chkbox8=0&chkbox9=0&chkbox10=0&chkbox11=0&chkbox12=0&chkbox13=0&chkbox14=0&fcol=&cqp=&col=allirs&col=&col=&qp
=&dt=an&inthe=604801&ady=17&amo=12&ayr=2005&bdy=17&bmo=1&byr=2006&nh=10&rf=0&qt=
None of them appear to apply to you.
Google Search Term
IRA restrictions
Anything which isn?t specifically prohibited is permitted and stock
ownership is therefore a permitted IRA investment.
There is no IRS prohibition against investing in privately held stock
as opposed to listed stock traded on an exchange. There will almost
certainly be limits posed by your IRA trustee which is very likely to
object if only because they may have no way to complete the
transaction ? remember, you can only contribute money to an IRA, not
stock or other assets. The holdings in your IRA have to be managed by
the trustee.
If your trustee is willing to add the stock you propose buying, then
you still face a complex legal question related to the purchase, such
as how the stock is valued.
The only legal problem I can foresee would relate to the structure of
your privately held company. Is this a corporation? If so, is it a C
or S corporation? Do you already own stock in it? Are you the only
stock holder? What assets does the corporation hold and would any of
them violate the IRS rules on collectibles or other prohibited asset
classes? This wouldn?t matter if you were investing in a public
corporation but you should check with a CPA or your IRA trustee to get
their opinion on this in your very unusual situation.
For example, if your privately held corporation existed ONLY to hold
collectibles, then the IRS and the trustee would certainly object.
I hope this helps. We here at Google Answers do not give legal advice
and, especially when dealing with the IRS where tax court rulings
could change things on a daily basis, we often can?t provide
definitive answers but, in this case, the list of items which the IRS
doesn?t permit you purchase and hold in a traditional (or ROTH) IRA is
really very short and simple.
The only prohibited item is collectibles.
However, as I stated above, although this answers your specific
question, I do caution you that the rules imposed by your IRA trustee
will almost certainly place many additional restrictions on what they
will buy for your IRA and in this instance that is far more important
than what the IRS rules say. The trustee is required to obey all IRS
rules as well as to follow any new changes in the law and rules, but
the trustee can also make other rules which have nothing to do with
the legal requirements and they are free to enforce these rules, even
if they are arbitrary ? the specific IRA rules will vary from trustee
to trustee and they are unlikely to be flexible since they would have
set these rules in place after extensive legal consultation.
I would add one note which you should seriously consider. Just why
would you want to buy stock of a privately held company and place it
in a tax sheltered investment?
How do you determine the value of the stock? How would the trustee or
the IRS determine the value of the stock? How would the trustee go
about buying privately held stock?
Thank you for bringing your question to Google Answers.
The bottom line is, there are always penalties for early withdrawal of
funds from an IRA to buy other investments outside the IRA, except if
you are withdrawing the cash within the regular rules of the IRS
concerning your age and the amount you are permitted to withdraw.
If you feel this was not an acceptible answer, please request a
clarification before posting a rating. |
Clarification of Answer by
siliconsamurai-ga
on
16 Jan 2006 12:34 PST
Hi, glad to help.
I have to point out that those are different questions from the
original but they are very simple.
A trustee is any corporate agent which has been approved by the IRS to
offer IRAs to the public, if some bank or investment firm advertises
an IRA, then they are the trustee for that particular IRA. You mention
Vanguard. Well, Vanguard is the trustee for that IRA. If you get an
IRA at a local bank, then that bank is the trustee.
Can you "rollover funds from a Vanguard IRA into an IRA whose
investment is stock in my privately held corporation?"
YES
You can rollover frunds from any IRA into ANY other IRA, that is basic
to the concept of having an IRA.
An Individual Retirement Account is a legal and financial insturment
which must conform to IRS rules. If it doesn't then you loose the tax
benefits of an IRA.
Your problem lies in finding an IRA (and hence an IRA trustee) which
will allow you to buy that privately held stock. If you can find a
trustee which will do so, then you can rollover your money from
Vanguard to that other IRA and do anything which the trustee permits.
I don't know, perhaps Vanguard will let you do so in your present IRA.
If not, you might have better luck with a small local bank or local
investment advisor withwhom you can develop a personal relationship
than a gigantic mutual fund company.
Google Search Term
What is an ira trustee
How to become an IRA trustee
http://www.irahelp.com/cgi-bin/forum/index.cgi/noframes/read/2813
There is an answer by a CPA
http://www.irahelp.com/cgi-bin/forum/index.cgi/noframes/read/2821
?The IRS has some requirements, the first of which is that the
custodian/trustee must be incorporated. I'm not sure what the
application process involves.
Fees are charged in a couple of ways. Some of the wirehouses charge a
flat fee per account. Advisors handling investments may charge a
percentage of the value of the assets.
Why not contact some custodians and ask them to send you copies of
their fee arrangements? ?
If you were thinking of becoming your own trustee, I would forget it,
the IRS would not look kindly on that idea.
The requirements for BECOMMING a trustee are different from the
requirements OF a trustee.
The IRS has regulations specifying how a financial institution can
become authorized to offer IRAs - in other words if they can become a
trustee for an IRA.
As for the requirement OF a trustee, that is, what the trustee will
allow you to do within the broad legal permissions granted by the IRS,
that depends entirely on the trustee.
You will have to ask them what restrictions they put on the IRAs they administer.
I can tell you the one thing they are NOT permitted to let you invest
in, anything else is up to them and the ONLY way to know is to ask the
individual trustee what their rules are.
As I explained in my answer, the ONLY restriction the IRS puts on what
you can hold in an IRA is that you CAN'T buy collectibles.
Your problem is finding a trustee which will let you buy that
privately held stock in an IRA which they hold in trust.
That would be an entirely different question and you would need to ask
that seperately or just talk with your local banks and any other
organization offering IRAs.
You may be confused by the fact that Vanguard probably has all of your
money in its mutual funds, but it is just another IRA.
I manage my wife's IRA with Fidelity and another with a credit union.
The Fidelity IRA is mostly stocks with a few small mutual fund
investments. The Credit Union is just CDs.
It is very easy to see what I can put in the Fidelity IRA - anything
which the Fidelity brokerage offers for sale from listed stocks to
money markets, to mutual funds. I couldn't buy a privately held stock
in that IRA simply because there would be no mechanism for completing
the purchase, not because the IRS has rules against doing so.
Managing a self-directed IRA is not the same thing as being a
financial institution which is the "trustee" of the IRA. You can
choose what to put in an IRA, but you can only choose from the menu of
things which the trustee permits.
To learn what a particular trustee will permit you will have to either
read all their documentation or simply ASK them.
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