Can Your Self-Directed IRA Buy a Business? (AI Gets This Wrong)

“Can I invest in a business with my IRA? If yes, what structure should I use?”

Can your IRA buy a business? In our September live Q&A, guest John Bowens of Equity Trust Company said it comes down to one question: will you run it? Then Laura Dohanes, CPA, read a line she hears a lot: “ChatGPT just told me I can create all the structure and just invest freely.”

Quick answer: If you’ll run the business, no. Buying a company you’ll operate with your IRA runs into the prohibited-transaction rules on services and personal benefit. The route people use instead is a ROBS (Rollover as Business Start-up): roll a traditional IRA or old 401(k) into the 401(k) of a new C corporation, which buys the company’s stock. A small, passive stake in someone else’s startup is different: that’s a normal self-directed IRA investment.

Can your IRA buy a business you’ll run? No

First, define the business and your role. If you’re buying a company to run it (you’ll be the CEO), your IRA can’t own it. You’d be providing services to and benefiting from a company your IRA owns, which runs straight into the self-dealing rules and can blow up the IRA.

ROBS: Rollover as Business Start-up

Where people can fund a business they’ll run is a ROBS. You form a new C corporation that sponsors a 401(k); you roll a traditional IRA or old 401(k) into it (a Roth IRA can’t be rolled into a 401(k)); and the 401(k) buys most of the new company’s shares (in John’s example, about 98%, with you keeping about 2%). Now you can run the business, bootstrapped by retirement money. It’s its own conversation, with strict compliance requirements (including an annual Form 5500), and the IRS opened a compliance project on these plans in 2009 and still calls them “questionable.” Set it up with professionals.

A passive stake in someone else’s startup

Change the facts: you’re not running anything, you just want to invest in a privately held startup — say, half a percent of an AI company alongside many other shareholders. That’s a passive investment, and an IRA buying privately held shares like that is routine, as long as no disqualified persons are involved, though an IRA can’t own S-corp stock, and an LLC stake can trigger UBIT.

“But ChatGPT told me I can…”

Laura pushed back with a line she hears constantly: “Are you sure, John? ChatGPT just told me I can create all the structure and just invest freely.” John sees a flood of AI-generated emails that are “somewhat close, but very much wrong.” Self-directed IRA rules have changed over time, and AI tools often pull from old laws. If you use them, check the sources, and work with professionals who read the regulations every day. Laura’s version: ChatGPT will tell you something wrong without apologizing, and choosing to believe it over a professional is on you.

AI doesn’t have a license to lose

John’s caution extends to social-media tax gurus pitching equipment leasing and other strategies without mentioning the conditions — like material participation. His test: AI isn’t signing your tax return, and neither are most gurus. A CPA who signs your return has a license to lose. Consider the strategy, but get a second opinion from someone with something at stake.

Official IRS reference: IRS — Rollovers as Business Start-Ups Compliance Project

Key takeaways

• Your IRA can’t own a business you’ll operate; that triggers prohibited-transaction rules.
• A ROBS lets a new C corporation’s 401(k) fund a business you run, with strict compliance.
• A Roth IRA can’t be rolled into a 401(k), so it can’t fund a ROBS.
• A small passive stake in someone else’s startup is a normal self-directed IRA investment.
• Verify AI and social-media advice with a professional who signs your return.

Can an IRA buy a business? FAQs

Related questions from this Q&A

• The full September self-directed IRA Q&A with John Bowens: every question on one page
• Flipping houses in a Roth IRA? The UBIT trap
• Self-directed IRA custodian: will they stop a bad move?

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Guest: John Bowens, Director & Head of Education and Investor Success at Equity Trust Company, appeared as a guest. Custodians, including Equity Trust Company, do not provide tax, legal or investment advice.

Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Every situation is different. Talk to a qualified professional about your specific facts before making any decisions.