The Internal Revenue Service has restrictions on how you can put your money to work inside an individual retirement account. Approved IRA investments include common stocks, mutual funds, bonds, certificates of deposit, cash and some property. IRA investors can also buy shares in a closely held corporation if they follow certain rules.
A closely held corporation does not allow the general public to buy its shares. In many cases, only a few business partners, or the members of a single family, have ownership shares and receive dividends from the corporation's net income. The charter and bylaws of each corporation give the rules on who can buy, sell and own shares; who has voting rights; and how shares transfer on the death or incapacity of an owner.
The IRS bans some assets from IRAs, including life insurance, some coins, antiques and collectibles. The rationale is that such assets do not provide a reliable stream of income in retirement, which is the purpose of an IRA. On the other hand, the agency does not rule out buying or owning shares in a closely held corporation, unless the corporation is a foreign business. Foreign shares can only be held in U.S.-based mutual funds or American Depository Receipts, which trade on U.S. exchanges.
When considering closely held shares for an IRA, note the IRS rules on "self-dealing" and family assets. Self-dealing includes using IRA money to invest in a business you own. It also includes carrying out a transaction that benefits your business or a business where you are a director or board member. The IRS also bans transactions between an IRA and the account's trustee or custodian.
You can't buy shares in a limited liability company run by your IRA manager, for example, or sell your stock shares to a trustee. Transactions must be at "arm's length," meaning with parties who have no interest in or control over the account. If there's any doubt on the rule, you can request a letter of determination from the IRS.
The IRS rules also ban transactions between an IRA account holder and members of his immediate family or descendants -- anyone who may have an interest as an heir or beneficiary. Restricted shares of a family business, for example, would not be allowed in an IRA. If you break the rules on self-dealing or disqualified investments, the IRS can levy income taxes on the transaction or void the IRA. This could subject you to income taxes on all of the assets and an early withdrawal penalty if you are younger than age 59 1/2.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.