Self-Dealing

Can I invest or loan money to the company I currently work or control?

If you are below 10% in ownership combined, yes! 11%-49% owners can consider investing if they are careful to avoid conflicts of interests and prohibited and self-dealing transactions. Over 50% owners generally should never invest.

What is a general rule of thumb to help me understand this rule?

Red Light: Over 50%

Yellow Light: 49% - 10%

Green Light: <10% *

*If you have a key position of control, you should still be careful investing. If you have complete control, you should likely never invest. 

Keep in mind all situations can have extra complications or prohibited transactions. If you under 50% or 10%, you should still not rush into an investment. It is wise to consult a lawyer or CPA before making any investment decisions, especially those in a company you own part of or work for. This could be your IRA at risk of distribution. 

Prohibited people can add to your hypothetical ownership stake

If you only own 10%, but your son and daughter own a combined 40% of the business, everyone's new total for their IRA in the family can be thought of as 50%.

What should I keep in mind?

  • All stock certificates and ownership of the company LLC or limited partnership should be in the name of the IRA.
  • You must invest in new shares, and must not buy old shares from yourself or a disqualified person.
  • An IRA cannot buy shares of a company that is owned 50% or more by a disqualified person.
  • You have to be very careful of self-dealing transactions when a disqualified person owns a significant portion of the company, or if that person is a key employee.
  • There should be no expected or connected "quid pro quo" for you investing in a company related to a disqualified person. Your salary, position, involvement, or professional relationship should not improve or be expected to change as a way to compensate you for your investment.
  • You can invest in a business that does not pay taxes, but you might have to pay UBIT or some taxes to retain full tax advantage status within your IRA.

What If I'm in a control position within the company?

If you are in control of the company, this can add to the complication of a prohibited transaction. The main reason the IRS sees people that own over 10% and key employees as prohibited persons are that you might use your influence to exert control over them in between a conflict of interest and your IRA.

If you are going to retain a board seat or a key controlling role, it could be wise to stay away from investing with your IRA completely. If you are equal partners in a business, this is much easier to do as you are equal partners with no ownership advantage over the other. 

You can feel free to contact our sales team, but the answer will be either to steer clear of this situation or consult a lawyer that we can connect you with on how to properly structure your company and leadership and weight costs/benefits if you are determined to invest with your IRA. 

If you do have any responsibilities that are coming close to a conflict of interest, you should never be voting or obtain between any decision related to the company and your IRA.

What about loaning money?

  • You must make loans at fair market rates, similar to those that a bank might provide your business.
  • Your loan must not change or be considered when evaluating compensation, as you cannot be paid personally for business done through your IRA
  • You can read more in our article about promissory notes.
  • You could take a loan from your 401(k) (up to 50% of the balance, limit of up to $50,000) with no strings attached as these types of loans come out in cash, NOT retirement dollars.

What if I'm investing in a hedge fund I'm associated with?

There are specific considerations that must be adhered to. Please schedule a meeting with a member of our Sales team.