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Employees have asked me many times if they can escape tax for exercising their incentive stock options and non-qualified stock options by contributing the options to a Roth or regular IRA account. the general answer is no. You can't assign earned income to a retirement account and escape taxation.

In addition, stock acquired using a stock option can't be contributed to an IRA or Roth. According to Internal Revenue Code Section 219(e)(1), contributions, except for rollover contributions, must be in cash.

Also be aware that selling assets to your IRA or Roth is a prohibited transaction.

However, the IRA or Roth could acquire pre-IPO stock by buying it from the company or an unrelated person.

For tax updates regarding employee stock options, subscribe to our newsletter, Michael Gray, CPA's Option Alert by filling out the form below.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.