We all have tax questions this time of year. 2012 is the year of many possibilities and changes, some as extreme as the “End of the World” and some as mundane as the decision whether or not to move or get a new car. Mayan calendar issues aside, this year means one more year for you to harness the power of the Roth IRA as a tax savvy means to create and eventually transfer wealth. Nevertheless, Roths are not the silver tax bullet in all cases, as Peter Rielly of Forbes recently pointed out in an article titled Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock.
Rielly writes about how Roths and S Corps really don’t mix well. In many ways it’s unfortunate, but probably also obvious, the powers of an S Corp can’t be combined with the powers of a Roth IRA.
As many small business owners already know, S Corporations can be supremely advantageous, if you’re in the position to use one, because they can avoid corporate income tax.
The Roth, meanwhile, avoids tax on future earnings by paying taxes on contributions upfront, rather than upon eventual distributions. Together that would have made for some serious savings for small business owners who also are thinking ahead and planning for their eventual estate transfers.
So, as already foreshadowed above, when it comes to combining Roths and S Corps you really cannot have your cake and eat it too. Case law is against you. After all, the S Corp election is only valid if all shareholders of the S Corp are valid, and a Roth IRA is apparently invalid.
The case is Taproot Administrative Services, Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee. I recommend reading the full article, as there are more moving parts and other alternatives to consider.
Reference: Forbes (March 28, 2012) “Hog Gets Slaughtered - Roth IRA Not Qualified To Hold S Stock”
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