Can an IRA Own S-Corporation Stock?
It's widely believed that self-directed IRA's are prohibited from purchasing shares in S-Corporations, but this is not true. If an S-Corporation is purchased in a self-directed IRA, there will be negative ramifications for the Corporation and other shareholders of the corporation, but not necessarily for the IRA that owns it.
"S" corporation status is a special tax election which causes a corporation to become a "pass-through entity". In other words, as an S-Corporation, the corporation itself does not pay income tax, the liability for which passes through to the owners (shareholders) of the S-Corporation. This can be a very favorable tax arrangement in many circumstances.
The law that created IRA's, ERISA (the Employee Retirement Income Security Act of 1974) explicitly prohibits only two types of assets: Life Insurance and Collectibles. S-Corporations are neither of those things, and thus not prohibited by ERISA to own S-Corporations.
However, IRS Revenue Ruling 92-73 (further supported by this appellate court case), shows that an IRA is not an eligible owner of S-Corporation stock . Ruling 92-73 clarifies that If an ineligible party - including an IRA - becomes owner of any shares in an S-Corporation, then the entire corporation loses its "S" status, potentially causing substantially negative tax ramifications for the corporation and all of its shareholders. However, the IRA's ownership of the corporation's shares are unaffected, and no distribution is triggered, unlike with assets that are actually prohibited.
Bottom Line: IRA's are not prohibited from owning shares in corporations. But if any such corporation has elected "S" tax treatment, that election will be disregarded and the corporation will revert to normal "C" corporation taxation.