Can I invest my IRA into a company that my husband is the president and owns 23% of the stock?

This was a question that came in and I thought that the question was good enough to post on my blog as I get this question alot from my clients.

Question: I have an ira currently invested the stock market. My question is around self directed iras and disqualified persons. My husband is the president of a corporation, and owns approx 23% of the stock. What I would like to do is turn my ira into a self-directed ira and invest it in a deed of trust secured by the land the coporation owns (in other words, a mortgage loan). Would this be a disqualified transaction? I’ve found the rules on disqualified persons to be a bit confusing.

Answer:  Thank you for the excellent question.  You are correct when you state that the rules on disqualified persons (and prohibited transactions) are confusing.  Unfortunately, I DO believe that if your proposed transaction were looked at  it would be considered to be a prohibited transaction.  While it’s true that the corporation your husband is President and a 23% shareholder of is not a disqualified person as to your IRA (assuming that no other disqualified family members own more than 27% of the stock), your husband is a disqualified person to your IRA.  The prohibited transaction rules of Section 4975 say that there can be no direct or indirect benefit to any disqualified person from an investment in your IRA.  It is this indirect benefit rule that would most likely lead to problems for you because your husband would indirectly benefit from the private loan made by your IRA to a company he works for and owns a substantial interest in.  Another issue is that the corporation is an entity in which you have an interest in which would affect your best judgment as a fiduciary for your IRA.  A benefit to a person in whom you have an interest which would affect your best judgment as a fiduciary can be deemed to be an indirect benefit to you, and of course you are a disqualified person to your own IRA. 

I have attached a couple of legal opinions, one from the Department of Labor and one from tax court, which may help you or your legal counsel to decide what to do.  Unfortunately, I cannot give you tax, legal or investment advice.  Good luck with your investing, and thank you for contacting me.

Attachments: Rollins v. Commissioner & DOL Advisory Opinion 88-18A

Thanks again for you question. Anyone, please feel free to submit your questions to me on this blog. Who knows, your qusetion may be helpful to others that are thinking about investing with a Self-Directed IRA.

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