Investing through an Individual Retirement Account (IRA) provides great flexibility, but the IRS has strict rules regarding who and what your IRA can invest in. A common question is whether an IRA can invest in a company or business owned by you or a family member.
The short answer is: In most cases, no. The IRS prohibits certain transactions between an IRA and a disqualified person, which includes you and certain family members. If your IRA invests in an entity owned by a disqualified person, it is considered a prohibited transaction and can result in severe tax penalties.
Understanding Disqualified Persons
Before determining whether an investment is allowed, it's important to know who is considered a disqualified person under IRS Code § 4975.
A disqualified person includes:
- You (the IRA owner).
- Your spouse.
- Your parents and grandparents.
- Your children and grandchildren.
- Spouses of your children or grandchildren.
- Any entity (LLC, corporation, trust, etc.) that you or a disqualified person own 50% or more of.
Since these individuals and entities are disqualified, your IRA cannot engage in any transaction with them, including investing in a business they own.
When Is Investing in an Entity Prohibited?
Your IRA cannot invest in an entity if:
✅ You personally own 50% or more of the entity.
✅ A disqualified family member owns 50% or more of the entity.
✅ You or a disqualified person control the entity (even if ownership is less than 50%).
✅ The investment results in a direct or indirect benefit to you or a disqualified person.
Example 1: Investing in Your Own Business
❌ Prohibited: You own 60% of a small business and want your IRA to invest in it. Since you own more than 50%, your IRA cannot invest.
✅ Allowed: You own less than 50% of a company, and the remaining ownership is with unrelated individuals.
Example 2: Investing in a Family Business
❌ Prohibited: Your IRA buys stock in a company that your father owns 80% of. Your father is a disqualified person, making the transaction prohibited.
✅ Allowed: Your IRA invests in a company owned entirely by unrelated third parties.
When Is Investing in an Entity Allowed?
Your IRA may invest in an entity if:
✅ You own less than 50% of the company.
✅ No disqualified persons collectively own 50% or more.
✅ The investment does not personally benefit you or any disqualified person.
Example 3: Investing in a Friend’s Business
✅ Allowed: Your IRA invests in a company owned by a business partner and other unrelated investors. As long as you don’t own or control the company, the investment is permitted.
Example 4: Investing in a Publicly Traded Company
✅ Allowed: Your IRA purchases stock in a large public company, even if you or a family member work for the company, as long as neither of you has controlling interest.
Consequences of a Prohibited Investment
If your IRA makes an improper investment, the entire IRA could be disqualified, resulting in:
❌ Immediate taxation of the entire account balance.
❌ Additional penalties and interest on unpaid taxes.
❌ Loss of IRA tax advantages.
To avoid these consequences, it’s best to consult with AET’s support team or a tax professional before making an IRA investment.
Final Answer: Can You Invest in an Entity You or a Family Member Owns?
✔ Yes, but only if you and all disqualified persons collectively own less than 50% of the entity and you do not control it.
❌ No, if you or any disqualified person own 50% or more, or if you receive a personal benefit from the investment.
When in doubt, always check with a qualified professional to ensure compliance with IRS regulations.
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