IRA Investments in Unlisted Companies?

A good place to start your research is page 45 of

Nothing stops you from, in general, having your IRA invested in closely-held stock so long as you're not the one holding it, and you do not violate related party rules.

there may also be limitations imposed by the IRA trustee

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-----> real address on hobokeni or hobokenx

I read page 45. What does "Nothing stops you from ... so long as you're not the one holding it". So who is holding it?

Yes as long as you avoid the self-dealing rules that are administered by the IRS & Dept. of Labor. E.g., if you buy shares in an unlisted company in which you or your spouse or lineal descendants are officers or have a controlling equity position, you are self-dealing. If you buy the private stock from a relative you are self-dealing. If you own the private stock and sell to the IRA you are self-dealing.

As someone else has said, you would need to find a trustee willing to manage these assets. Most trustees will not. When you find a trustee be prepared for big fees. Every year the trustee must report to the IRS the value of your IRA. Putting a value on private stock or investments in entities without a readily ascertainable value requires expertise that does not come cheap.

If that is even

The trustee documents the investment. See above.

Out of my old papers I found a Forbes article from 2004 on this issue. It is still available online at:

That Forbes article was great and I saved it off for future reference.

Using one of these specialty custodians, would it be possible for the IRA to open up a brokerage account in a foreign country (e.g., Australia or Hong Kong) and trade directly on those exchanges? You would unfortunately have some withholding taxes on interest income and dividends, but it would still open up a lot of investment opportunities (e.g., the ability to sell covered calls on a foreign security, which you cannot normally do through a US broker).

If the IRA owned the foreign account, would that account need to be disclosed each year to the IRS as a bank account holding funds in a foreign country?

Answering in reverse:

Yes, FBAR is required for any retirement account in which you have an ownership interest or control over a foreign account.

I see no prohibition against opening any type of foreign account. If you can find a country that allows foreigners to trade on their stock exchanges and you can find a company that is willing to open the account in the name of a US IRA, then you can do it. I don't know why you would want to do this as I am almost sure that there are US companies that will open an account for you and trade directly on foreign exchanges. I believe this is called trading in foreign ordinaries. Again, you are looking at greater than normal fees, FX costs and no way to obtain a tax benefit (no foreign tax paid deduction nor any foreign tax credit) for foreign taxes paid on foreign income inside the IRA.

Of course if you shift money to a foreign broker account once, you don't have ongoing FX costs.... The money stays in the foreign account across all asset buys and sells within the account.... You may have greater custodian fees once a year, but you make back some of that in the form of lower commissions since you involve one broker instead of many. You are right you lose withholding taxes, and that is of course nasty. But that would only be on dividends and interest, and in most foreign markets they will not withhold for capital gains.

If you open an account with a US broker, they can buy ordinary shares on foreign exchanges. But they do this through a custodian, and the fee structure and flexibility is often quite poor. Some reasons to want to trade directly on the foreign exchange:

- You are able to set a limit order at any price (through a US broker you often have to set the limit within 5% of the current trade)

- You can enter your orders during trading hours for the foreign market (through a US broker you typically have to deal with the "foreign desk" at hours that are US business hours and when the foreign market opens you have no interface to your orders)

- You can trade options like selling covered calls on the foreign exchange (this isn't even an allowed option for US brokers working through a custodian in the foreign exchange).

- In case of markets with electronic registrars, like Australia, you are able to enter your ownership of the security in their electronic system, so you have more secure ownership of the asset. In the US, surprisingly, most people never register stocks they buy in their name. Instead the US broker is the official owner of the stock, and you just trust their accounting systems to credit the stock to you. In Australia, a broker can go bankrupt and it doesn't affect your ownership of stock at all because the broker never owned the stock at any point.

Unfortunately, the requirement for FBAR even when the asset is owned in an IRA is unfortunate. I get the feeling that the IRS really hates such situations and targets anyone owning a foreign account for more frequent audit. So gain may not equal the pain.

IRAs have to be established with U.S. based financial institutions. To open an account with a foreign broker, you have to find a U.S. based IRA custodian that offers that service.

Unfortunately for the honest people who establish foreign accounts, tax cheats use foreign accounts to hide earnings from the IRS.

That's clear. If you follow other posts in the thread, there are specialty IRA custodians who are apparently willing to handle non standard investments for an IRA. There was a pointer to a great article on this subject.

That's clear, but for an account that is properly held within an IRA, why would the IRS care? The gains in that account are not taxable in any case, and in order to establish the account you had to go through a custodian that would be reporting the account values anyway. So the IRS has a close tab on the IRA assets by a different method. This seems to be a case where the law on disclosure is too general and would already by handled indirectly by other laws that are specific to the account type (IRA).

Without looking anything up my guess is because the law requires them to care.