New corporation-- owner shares in Roth?

[Ryan]

Can you, say, start a C corporation and buy all your founder shares in a self-directed Roth? Then make regular distributions.

If you need to access the funds early, just pay the 10% penalty?

[jfoxcpacfp]

This would almost certainly run afoul of the self-dealing rules. An IRA account owner cannot receive any personal gain with retirement accounts until retirement. If that happens, you would not only pay a 10% penalty, but your account would be disqualified from Roth IRA status.

[Zaphod]

I dont know about early access without penalty but people do this kind of thing, notably VC types with shares in start ups, a couple papers have written about it. Idea being shares go in basically worthless and can appreciate to billions in a triple tax free system.

[jfoxcpacfp]

Zaphod wrote:

I dont know about early access without penalty but people do this kind of thing, notably VC types with shares in start ups, a couple papers have written about it. Idea being shares go in basically worthless and can appreciate to billions in a triple tax free system.

Click to expand...

Let me clarify my answer - it is ok to use a Roth to invest in a corporation that you are not involved in, it's done all the time. otoh, the OP asked if it was ok to "start" a C corporation and buy all of your "founder" shares in a Roth. The personal involvement element is what I was talking about. It is possible if you have no involvement in the corporation. Kind of like using your Roth to buy a vacation rental and then living there part of the time. Big no-no. You can't even pay the bills yourself.

[notadoc]

How A Serial Entrepreneur Built A $95 Million Tax Free Roth IRA

https://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/#b4cb38958f37

 

Don't know the details and certainly not questioning Johanna expertise.  Probably a completely different animal.

[jfoxcpacfp]

notadoc wrote:

How A Serial Entrepreneur Built A $95 Million Tax Free Roth IRA

https://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/#b4cb38958f37

 

Don’t know the details and certainly not questioning Johanna expertise.  Probably a completely different animal.

Click to expand...

It's a great article, but you need to read it. It does not contradict what I said - see the section under Mega-Roths.

And you can question my expertise any time you want, no offense taken and there are certainly occasions when I need to be corrected  

[Ryan]

Thanks for the input. From my research, the most common way to finance a C-corp with a retirement account is called "Rollovers as Business Startup"-- or ROBS. It allows the C-corp creator to buy company stock with the exception used allowing companies to offer their own stock in retirement plans. The IRS hasn't come down on most of them yet--

Step 1) Find a ROBS broker that specializes in these transactions.
Step 2) Open a C corp. Don't issue any shares yet
Step 3) Set up a qualified profit-sharing plan (roth 401k) with the C-Corp that with an amendment allowing employees to invest 100% in employer securities.
Step 4) Rollover your IRA to the C-Corp's plan.
Step 5) Buy your corporation's shares with your plan.
Step 6) Remove the plan amendment allowing employees to invest in employer securities?? This step is a potential issue

https://www.sba.gov/blogs/can-or-should-ira-own-your-business

Conclusion

ROBS transactions may violate law in several regards. First, this scheme might create

a prohibited transaction between the plan and its sponsor. At the time of the exchange

between plan assets and newly-minted employer stock, the value of the capitalization of

the entity is equivalent to the value of all plan assets, when in reality, the entity may be

valueless and asset-less for an indefinite period of time. Additionally, this scheme may

not satisfy the benefits, rights and features requirement of the Regulations. The primary

utility of the arrangement may only be available the business's principal individual.

Specific facts will need to be evaluated on a case by case basis in order to make a

proper determination as to whether these plans operationally comply with established

law and guidance. Technical advice requests may be submitted after consultation with

group managers. For this reason, employee plans specialists are directed to resolve

open ROBS cases as described herein.

https://www.irs.gov/pub/irs-tege/robs_guidelines.pdf

 

The August 27, 2010 IRS Public Phone Forum

Monika Templeman (Director of Employee Plans Examinations and Colleen Patton, Area Manager of Employee Plans Examinations for the Pacific Coast) began the presentation reaffirming the IRS’s position that a transaction involving the use of retirement funds to purchase a new business is legal and not an abusive tax-avoidance transaction as long as the transaction complies with IRS and ERISA rules and procedures...

http://www.irafinancialgroup.com/wp/what-does-the-irs-say-about-robs/

Pretty expensive transactions all around, and it looks like there are lots of ways to mess it up.