I am looking at establishing either a self directed IRA or a Roth IRA. Question # 1 is: I am looking a buying into a Hong Kong private company. Is this allowed by the IRS? When there is a distribution of profits back to the 401(k) or the Roth IRA are these distributions taxable? Question #2. If I do buy a portion of the Hong Kong company with my 401(k) and later wish to convert this to a Roth IRA – can it be done? Will I just pay the 40% tac on the initial investment or what?
To answer your first set of questions, yes, the IRS allows you to invest in a Hong Kong private company (or more properly, the IRS doesn’t restrict you from investing in a Hong Kong company), although the investment is reported to the IRS each year on IRS Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts). When there is a distribution back to the 401(k) or IRA the distribution isn’t taxed from the U.S. side, but you would have to check with the law in Hong Kong to see if they would tax the distributions.
To answer your second set of questions, if you have an Individual 401(k) and buy the company stock with it, at this time conversion to a Roth IRA is only possible if you have a distributable event such as termination of your employment or termination of the plan (there have been some proposals to allow conversions within a 401(k) plan but as far as I know they haven’t gotten through Congress as of this writing). However, if your plan has the Roth 401(k) feature and you have the ability to direct the investment into that portion of your plan, then qualified distributions from the Roth 401(k) are tax free to you. Whether your plan has a Roth 401(k) feature and whether you have made any contributions to that portion of your plan is something you will need to figure out from your plan document and/or your plan administrator. Whenever you do a Roth conversion, the value of the assets converted is added to your taxable income for the year in which you did the conversion (except for 2010, when you can divide this “conversion income” 50% into 2011 tax year and 50% into 2012 tax year if you like). If I understand your last question correctly, you would pay tax based on the value of the stock at the time of conversion, not the value of your initial investment.
I hope this answers your questions. I realize that sometimes the answer to a question raises more questions, so please feel free to contact Nathan, Ryan or myself if you need more information about self-directed IRAs or Individual 401(k)s. Thank you for your inquiry, and have a great weekend!