Written by: Dana Udumulla
Key Points
- Self-Directed IRAs allow you to invest in alternative assets such as real estate, private businesses, precious metals, and promissory notes.
- S-Corporations avoid double taxation on corporate income earned by reporting profits and losses on shareholders' personal income tax returns.
- Although ERISA does not directly prohibit an IRA from investing in an S-Corporation, the law that rules S-Corporations does not allow it.

Self-Directed IRAs (SDIRAs) are known for offering investors unparalleled flexibility when choosing where to allocate their retirement savings. Unlike standard IRAs that are typically limited to Wall Street products, Self-Directed IRAs allow account holders to invest in a wide range of alternative assets. These assets can provide potential opportunities for significant retirement savings growth and diversification. Before investing, it is considered best practice to conduct due diligence to understand the specific rules and regulations that govern self-directed accounts.
One question we often receive is “can a Self-Directed IRA invest in an S-Corp?” While the simple answer is no, we will dive into the details of the possibility of investing in S-Corps and private businesses with a Self-Directed IRA in this blog.
What Can a Self-Directed IRA Invest In?

Standard IRAs are typically limited to stocks, bonds, and mutual funds. A benefit of Self-Directed IRAs is that this account allows for the investment in a wide range of alternative assets such as real estate, private businesses, precious metals, and promissory notes.
What Is Not Allowed To Be Invested In With a Self-Directed IRA?
Self-Directed IRAs can legally invest in almost any asset. The only assets that are off-limits according to IRS guidelines are collectibles, life insurance, and, indirectly, S-Corporation stock.

What Is an S-Corp?
The IRS defines S-Corps as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.”
One general benefit of a company structured as an S-Corporation is that the taxes flow to the shareholders. This allows S-corporations to avoid double taxation on the corporate income. This is typically attractive to businesses who qualify to be this type of corporation.

S-Corp vs. C-Corp

A corporation, also known as C-Corp, is an independent legal entity owned by shareholders. C-Corps are held legally liable for the actions and debts of the business. They are required to pay federal, state, and sometimes local taxes. C-corps have two layers of tax, (1) a corporate level tax and (2) shareholder tax, which is subject to tax on corporate dividends received.
On the other hand, an S-Corporation avoids the double layer of taxes. S-Corporations are treated as a pass-through entity, such as an LLC, for federal income tax purposes. All income, loss, deductions pass through to the shareholders and reported on their federal income tax return.
What Are The Requirements To Be an S-Corp?
The IRS details to qualify for S-corporation status, the corporation must be:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations, or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).
The corporation must also submit IRS Form 2553, Election by a Small Business Corporation signed by all the shareholders.
Can a Self-Directed IRA Invest in an S-Corporation?
Although ERISA does not directly include S-Corporation shares in prohibited assets for IRAs, the law that creates S-Corps does not allow it. The law states that S-Corp shares must be owned by individuals who are U.S. citizens or residents. Since a Self-Directed IRA is a separate legal entity from its owner, therefore not an individual, an SDIRA is not a permitted shareholder of an S-Corp. If an SDIRA invests in an S-Corporation, the S-Corp status would be lost.

Can I Invest in a Business With a Self-Directed IRA?

A Self-Directed IRA can invest in a private business, also known as private equity or private placement. Some common types of private business investment opportunities you can invest in with a Self-Directed IRA include Limited Liability Companies (LLC) , private hedge funds, private REITs (Real Estate Investment Trusts), startups, and small businesses.
Investors seeking to diversify their portfolio and have more control of their investments may consider investing in private businesses with their Self-Directed IRA. When invested in with an SDIRA, your funds can also grow tax-free (Self-Directed Roth IRA) or tax-deferred (Self-Directed Traditional IRA).
One way you can invest in a private business is through a classic Self-Directed IRA. In this model, the account holder directs the Self-Directed IRA custodian to invest in the asset of their choice. Another account type available is a Self-Directed Checkbook IRA. With a Checkbook IRA, a Self-Directed IRA LLC is created with a dedicated checking account so that the investment can be made by simply writing a check or sending a wire, without going through the custodian for everyday transactions.
Conclusion: Let’s Tie It All Up
While investing in an S-Corporation is not directly allowed with a Self-Directed IRA, there are still many investment opportunities for those seeking to diversify their retirement portfolios. Schedule a call with a Self-Directed IRA Specialist today to discover more about what you can invest in with a Self-Directed IRA to grow your retirement savings.
