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Self-Directed Investing Into A C-Corporation or Private Stock (with Qualified Funds)

Jan 21, 2019

Privately held companies, are companies whose stock is not traded publicly. I.e., the stock cannot be bought and sold on a public stock exchange. Often, these companies are just forming or are owned by a single family.

A corporation can issue two general types of stock: common stock and preferred stock. Provident Trust Group, as the custodian, holds the original stock certificate(s) in safekeeping for benefit of the account owner, if stock certificates are issued.

 

You cannot participate in a prohibited transaction

When using retirement funds to invest in a C-Corporation or Private Stock it is important for account owners to understand Internal Revenue Service (IRS) rules and regulations to avoid engaging in a prohibited transaction with a disqualified person.

A prohibited transaction is any improper use of the retirement account by the account owner, beneficiary, or any disqualified person. Doing so could lead to a complete distribution of the account with taxes and penalties incurred.

A “disqualified person” includes, but is not limited to:

  • Yourself
  • Your lineal ascendants and descendants
  • The spouse of a lineal descendant
  • Your spouse
  • Any entity that is owned 50% or more by disqualified persons
  • An entity that is controlled 50% or more by disqualified persons

 

Examples of prohibited transactions include:

  • The account owner, or their lineal descendants, or a disqualified person combined own 50% or more of the company at the time of purchase.
  • Using qualified funds to invest in a subchapter S-corporation.
  • The account owner works for the company.

DISCOVER THE POWER OF TRUE SELF-DIRECTED INVESTING

Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

Discover the power of true self-directed investing

Our Self-Directed IRA allows you to invest in what you want, when you want. The investment possibilities are endless.

When using your qualified account to invest in a C-Corporation or Private Stock, there are a few key items to remember:

  • You are responsible for performing due diligence on your investment. Every investment has unique risks and any decision to invest should only be made after you conduct a thorough review of the investment and any related parties. Provident Trust Group is a passive, directed custodian and as such does not provide any type of investment advice or due diligence.
  • Provident Trust Group cannot hold any publicly traded assets. If the stock you want to invest in is traded on a public exchange it cannot be held in a Provident Trust Group account.
  • All income generated by the investment must be paid to your qualified account.
  • You must provide a Fair Market Value of all assets held in your qualified account annually.

Required Documentation

  • Direction of Investment
  • Subscription Agreement or Purchase Agreement
  • Articles of Incorporation and By Laws
  • Copy of the Tax Identification Number
  • Original Stock Certificate

 

Investment Titling

You and your qualified account are two separate entities and your qualified account is considered the legal owner of this investment. As such, all documents must reflect this ownership. Failure to title the asset correctly may cause delays or tax consequences. The correct titling for all investment documents should be as follows:

“Provident Trust Group, LLC FBO: your name and account type

 

Resources

IRS Publication 590A – Contributions to Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590a.pdf

 

IRS Publication 590B – Distributions from Individual Retirement Arrangements (IRAs)
https://www.irs.gov/pub/irs-pdf/p590b.pdf

 

IRS Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
https://www.irs.gov/pub/irs-pdf/p598.pdf

 

Internal Revenue Code 4975 – Tax on prohibited transactions
https://www.law.cornell.edu/uscode/text/26/4975

 

Frequently Asked Questions

Q: Can my qualified account invest in an entity that I or another disqualified person owns?

A: No, that could result in a prohibited transaction.

Q:  What happens if the private stock I own becomes public?

A: If your qualified account at Provident Trust Group holds private stock that is going public, you need to find a custodian that can hold publicly traded stock and transfer the stock to an account there.

Please Note: Provident Trust Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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