Handle with Care
Most IRA owners invest their funds in traditional assets, such as stocks, bonds and mutual funds. But some intrepid investors have enjoyed impressive, tax-deferred returns — or even tax-free returns in the case of a Roth IRA — by using their IRAs to hold rental real estate, business interests or other alternative assets.
Despite the appeal of earning higher returns in a tax-advantaged account, alternative-asset IRAs contain a minefield of tax traps that can quickly wipe out the potential benefits. For example:
Mortgaged real estate held in an IRA can trigger unrelated business income tax. Real estate may also create problems when traditional IRA minimum distributions are required (beginning after age 70½).
Your dealings with a business in which your IRA has an interest may violate the prohibited transaction rules, resulting in substantial taxes and penalties.
Transferring S corporation stock to an IRA may terminate the company’s S status and trigger corporate tax liability.
So if you’re contemplating an alternative-asset IRA, please contact Joe Mentrek at 216.928.5343 or firstname.lastname@example.org.