Life and Death Planning for Retirement Benefits

Chapter 8: Investment Issues; Plan Types

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B. Hedge funds and other “private” investments. IRA investment in hedge funds and similar private investments sometimes creates logistical difficulties. See, e.g. , PLR 2010- 13067, in which the participant, to meet a deadline for investing in a particular partnership, deposited cash in the partnership, intending to later (when rollover funds were received from another IRA) “restructure” the partnership investment as an IRA investment, a procedure that obviously does not work. The IRS granted him a late rollover waiver ( ¶ 2.7.05 – ¶ 2.7.07 ) because he relied on incorrect financial institution advice. A more common problem with these investments is titling mistakes. Title to IRA assets must be held by a bank (or other institution that has gone through the IRS process for approval to hold IRA assets). § 408(a)(2) . An individual can NOT hold direct title to assets that are supposedly in his IRA. Thus, the title of a partnership unit held by an IRA should be “[Name of bank], as custodian [or trustee] of [name of participant] IRA.” This requirement can be easily overlooked when the IRA owner wants to invest in a hedge fund, LLC, or other private investment vehicle. The hedge fund accepts money that is supposed to be a rollover from an actual IRA or plan, deposits the money in its fund, and opens an account entitled “John Doe IRA.” Because there is no bank holding title to the account, however, this investment is not “in” an IRA; it is owned by John Doe directly. The result is a taxable distribution from the original plan or IRA that the money came out of. If the funds came from an IRA or plan distribution that the participant thought he was simply rolling over or transferring (still inside an IRA) to another investment vehicle, the participant may be able to get a hardship waiver of the 60-day rollover deadline ( ¶ 2.7.05 – ¶ 2.7.07 ) that will allow him to get the money back into an IRA. The IRS granted such waivers in PLRs 2007-37047, 2007-37048, 2009-19066 (real estate limited partnership), 2009-21038 (limited partnership), 2009-31063 (investment pool), and 2010-05058. In each of these PLRs, it appears the participant relied on information from the company that was to receive the investment and/or other financial advisors in assuming that the new investment was indeed properly held in a rollover IRA. However, in PLR 2010-15039, the IRS denied a waiver to an IRA owner who withdrew from her IRA and used the money to buy a share of “Company C” based on a seminar she attended and (she claimed) assurances from the lawyer for Company C that this would constitute a valid rollover and IRA investment. The difference between this and the “winning” waiver requests is not entirely clear, except that in this one no advisor or company admitted any error. In the successful deadline-waiver requests based on failure to have a bank hold the “IRA” investment, the financial institutions and/or advisors apparently did admit they had incorrectly advised the participant. C. S corporation stock. Owning “S corporation” stock inside an IRA or Roth IRA does not disqualify the IRA. However it does cause the corporation to lose its qualification as an S corporation, with the disastrous result that the corporation will be taxed as a regular “C” corporation. Rev. Rul. 92-73, 1992-2 CB 224; Reg. § 1.1361-1(h)(1)(vii). Though the Code section that creates S corporations does not specifically prohibit S corp. stock ownership by an IRA, the IRS has consistently ruled that IRAs (and Roth IRAs) are considered “trusts” for purposes of the Tax Code. No trust may own S corp. stock other than a “grantor trust” or an “electing small business trust,” and an IRA is neither of those. § 1361(b)(1),