Can an IRA Be a Partner in a Partnership?

by Jack Ori, studioD

An individual retirement account, or IRA, may invest retirement income so that it grows by the time you are ready to retire. An IRA may invest in a partnership, becoming a limited partner. The partnership pays dividends directly to the IRA account. You may be able to take business tax deductions if your IRA becomes a limited partner in a company.

Limited Partnership

If your self-directed IRA is a limited partner in a partnership, the IRA can be used to buy and sell stock in the partnership, but you may not make any managerial decisions for the company regardless of how much stock you own in it. The IRA must buy stock directly from the company rather than via a public trade and may only sell the stock back to the company.

Tax Advantages

Limited partners are entitled to take tax credits for investment expenses and for investment losses, but they are not responsible for the debts of the partnership. Thus, your IRA gives you the tax advantages without hurting your finances if the company goes into debt. In addition, dividends to your limited partnership are taxed as long-term capital gains, which are taxed at a rate lower than those of most investment dividends.

Higher Dividends

You may receive higher dividends if your IRA is a partner in the company than you would if you invested as a private individual. Partnerships must distribute the majority of their dividends to shareholders on a regular basis to qualify for tax breaks. Thus, because the company has a limited partnership with your IRA, it will be motivated to pay dividends into your IRA on a regular basis.

Business Expenses

Because your IRA is a limited partner, you may deduct business expenses from your taxes. For example, you may deduct interest payments on loans to your business and depreciation on business equipment from your taxes as a business expense. You also may deduct operation expenses, such as the cost of goods sold, from your taxes.

About the Author

Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.