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George Saenz, the Tax Talk columnistCan a Roth account 'own' an LLC?

Dear Tax Talk,
I am using a self-directed Roth through Mid Ohio Securities to buy and sell real estate. I can buy unregistered securities in a corporation or invest in a limited liability company with my Roth now. Could I have the Roth own an LLC that I use for conducting business and see the profits pass through to the Roth? -- JS

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Dear JS,
A Roth IRA is a great investment tool, made only better if you can invest in your own company and later sell that company tax-free and live off that money tax-free.

I just worked with a client who was acquiring the stock of a business, and we structured it so that his Roth IRA actually bought the stock. The acquisition was 70 percent bank financed and 30 percent purchaser financed. The company actually took on the amounts as debt and used the cash to redeem the stock of the seller. The Roth IRA acquired a nominal interest in the company since it didn't have a lot of funds in it, but once the other stockholder was redeemed, the Roth wound up with around 95 percent of the stock.

Due to some technical rules that the IRA custodian and an advising attorney provided an opinion on, a sibling of the purchaser acquired the remaining stock. The sibling was necessary to avoid prohibited transactions with the IRA. The stock was in a conventional corporation but an LLC can be taxed as a conventional corporation. I don't believe the Roth can or should own an LLC taxed as a partnership because flow-through from the partnership can cause tax complications.

There is scant legal precedence or IRS guidance on this issue, so I suggest you find a good attorney and IRA custodian. My client used Pensco out of San Francisco as the IRA custodian and Pensco recommended the attorney.

A word to the wise: not every thing is guaranteed here. But measure the outcome against the downside and have a good accountant involved with all the parties to the transaction.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: Jan. 31, 2003
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