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Since I can't transfer/gift shares directly to my Roth IRA, what's the most tax-efficient way for my Roth IRA to take ownership of as many units of my startup as possible?

Is this even possible? If not why?

  • 3
    Upvoting: It's a bad idea, but a good question. – keshlam Nov 21 '14 at 14:20
  • The question assumes that it is possible to hold shares of my own LLC company within a Roth IRA. I think this is an important question but needs to be refrased in order to be answered correctly. – IanEdington Nov 28 '14 at 14:29
  • Why is this being down voted? – IanEdington Nov 28 '14 at 15:03
  • @IanEdington The reason for downvotes might be that some people have read littleadv's response which is right on point, and possibly read OP rkr's self-answer which suggests directing the IRA custodian of a non-self-directed IRA to make blatantly illegal transactions. – Dilip Sarwate Nov 28 '14 at 15:19
  • Thank you @DilipSarwate for your answer. It makes sense that people would downvote for those reasons. However, do those same reasons not make this an extremely important question to be asked and answered properly? I have been asked this exact same question in Canada about RRSP's and TFSA (like 401k and Roth IRA). If the answer to a question is 'No that's illegal' it doesn't make the question any less important. – IanEdington Nov 28 '14 at 21:54
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Since I can't transfer/gift shares directly to my Roth IRA, what's the most tax-efficient way for my Roth IRA to take ownership of as many units of XYZ LP as possible?

None.

XYZ LP has some high fair market value so selling those shares directly to my Roth IRA seems incorrect.

Also - illegal.

I thought of incorporating an LLC ("MY-OWN LLC"), investing my Roth IRA in MY-OWN LLC, then gifting my partnership units to MY-OWN LLC, but the $300~ per-year costs of running an LLC is relatively hefty and I think I can only gift $13,000 in partnership units before getting taxed.

No, you cannot do that either.


That ^ there - that's the bottom line. Bottom line is that you cannot self-deal in a self-directed IRA (or any other retirement account). That is what is called a prohibited transaction. Any of the types of the transactions above will lead to your self directed IRA being disqualified, in its entirety, and the whole worth of that IRA will be considered distribution to you, taxed, and penalized.

You cannot transfer anything to your IRA that you own other than cash (or cash equivalent, i.e.: you can deposit a check, wire money from a bank account, etc). You cannot transfer any property, in any way, into your IRA.

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    +1 I think that last paragraph should be in boldface to emphasize that point to the OP; else he will be coming back with more ideas to accomplish what he wants to do. – Dilip Sarwate Nov 19 '14 at 14:36
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I want to follow up that I understand the risk of crossing the line on the IRS's policy on prohibited transactions.

I've found that the best approach is simply to issue units of my startup, XYZ LP at some fair market value determined by my accounting firm, and have my IRA custodian purchase those units. Since the profit potential of a startup is extremely volatile and speculative, the units can be valued at a reasonably low unit price.

  • If you succeed in accomplishing this transaction I would be very interested in knowing how you actually do it and the circumstances of the transaction. – IanEdington Dec 1 '14 at 14:31

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