Individual retirement accounts are a potential source of cash to fund a new business opportunity or grow an existing business. Investments in IRA accounts are not legally limited to bank CD’s, stocks, or bonds. You may have seen advertisements about placing gold in your IRA. This is only one of many investments options available.
First, choose a reputable company as your custodial agent. I use Entrust Arizona http://www.theentrustgroup.com/. Investors can roll over funds from different types of 401k accounts and Roth IRA accounts by opening an account at an investment firm that handles alternative investments. You can Google the topic and find books and other firms providing the service.
You can direct these investments using various options. For example, you can buy real estate, including rental property. You also can invest in a limited liability company (LLC) or a corporation.
One advantage in this strategy is that can invest where you have the most knowledge. If you understand your local real estate market, you may do better investing in a rental house over stocks. Likewise, you may do better investing in a business you know very well over investing in corporate bonds. You can also use this investment strategy to start a side business.
If you want to start a new business that requires $100,000 investment and you have funds in your IRA account; you can form a LLC company, invest the funds, and start your business. You are not required to pay taxes as you would with a withdrawal.
Any increase from the value of your investment flows into your IRA. This growth becomes tax deferred. It is not taxed as personal income as normal LLC income would be taxed.
When adapting this approach, you must be very careful to comply with IRS regulations and practices. While you can buy LLC companies, you must be very careful not to violate IRS guidelines involving a business you run. The penalty could mean that your investment would be considered a withdrawal and taxable. The law requires that you avoid self-dealing transactions between yourself and your IRA.
You can avoid these pitfalls with careful planning and expert guidance. I am not a CPA or attorney and cannot furnish tax advice. I strongly recommend that you obtain wise counsel. As Solomon suggested, “A wise man will hear and increase in learning and a man of understanding will acquire wise counsel.” (Proverbs 1:5, NASBB) A CPA or attorney understands these rules, but you must take time to understand IRS regulations as well.
I have seen business people withdraw money from IRA accounts, pay a high tax rate, and then invest it in a business. When the goal is to fund a business opportunity, why take the tax hit? The worst of both worlds occurs when you withdraw IRA funds, pay the taxes, and then the business fails. Then, you most likely will not be able to deduct your business loss, unless you have other significant income.
I recommend this strategy only for money you can afford to lose. You can ask others to invest IRA money in your businesses when they follow the same guidelines. If married, only use this investment strategy with the full understanding and agreement of your spouse.
Firms who handle these types of IRA accounts charge administrative fees higher than most traditional IRA custodians. These fees are well worth the money when you have the opportunity to use IRA money to fund a business. Several of my clients have used this strategy effectively.
I cannot provide comprehensive advice on how to take these steps in a short blog. You must work with tax professionals. My goal is to share the idea and direct you to a strategy that may work for you. Using IRA money is not the right choice for every business owner and IRS regulations may not permit you to utilize this tool in every circumstance. With careful planning you can determine if this is the right path for you.
Steve Marr, your Christian Business Coach
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