Work & Purpose

Start Your Business With Your IRA

A retirement adviser offers a four-step plan to do it

Are you looking for investors for your startup or business plan? Well, if you believe in your business idea, why not make an investment yourself? You can raise money to fund your startup using a self-directed Individual Retirement Account (IRA).

This involves financing your company using your retirement account so you can protect its capital gains. To understand the process, you must first understand the difference between a regular IRA and a self-directed IRA.

Traditional IRA Vs. Self-Directed IRA

Traditionally, investments made through an IRA are controlled by the financial institution in which the account is held and can only be made with things like mutual funds, stocks and bonds. But a self-directed IRA opens up your investment choices to the likes of real estate, startups, franchises and precious metals.

However, self-directed IRAs require you to hire a custodian who can assess alternative investment assets and provide the necessary recordkeeping services. Bear in mind that these custodians do not give you investment advice; they provide oversight services.

4-Step Process to Start Your Business With an IRA

Here is the four-step process to fund your business with a self-directed IRA:

  1. First, establish a self-directed IRA through an experienced custodian who is well-versed with the rules and regulations of such accounts.
  2. Execute a rollover from your existing IRA — or your 401(k) or 403(b) account — to the self-directed IRA.
  3. Next, establish a Limited Liability Company (LLC) which will be managed by the IRA’s owner. This is the legal entity for your business.
  4. After you have an LLC, you can initiate the purchase of membership units in it. by the self-directed IRA using the funds in the self-directed IRA.

Now, you will be able to use the money in your IRA to fund your business without having to make any early withdrawals that would attract penalties or additional taxes from the Internal Revenue Service. The LLC can also borrow money, allowing you to use leverage to increase returns. Additionally, it minimizes the number of transactions that need to be executed by the trustee, lowering the overall cost of owning a self-directed IRA.

Watch Out for IRS Concerns

If you are considering investing through your self-directed IRA, bear in mind that the IRS is extremely vigilant about doing so. Mistakes made during the setup or management of the account can lead to your owing expensive taxes or penalties as a consequence.

So, choose an experienced custodian who is well-versed with government rules and regulations and can provide administrative services such as maintenance of records and issuing client statements accurately.

Finally, as with any decision that involves taxes, be sure to consult your accountant before taking action!

By Rick Pendykoski
Rick Pendykoski is the owner of Self Directed Retirement Plans, a retirement planning firm based in Goodyear, Ariz. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. He regularly posts tips and articles on his blog at SD Retirement as well as sites such as Business.com, MoneyForLunch, Biggerpocket and NuWireInvestor. Email him at [email protected] or visit the SD Retirement site.

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