Use Your IRA to Fund Your Small Business

October 19, 2010

Many of us have at least one Individual Retirement Account (IRA) as part of our retirement planning portfolio. IRAs are an essential part of retirement planning, because you have much more control over your investment choices than you do for a 401(k) plan or employer-sponsored retirement plan. Even the most flexible and comprehensive 401(k) plan will only have a limited number of investment options, depending on what company is acting as the plan’s sponsor.

Even though IRAs are much more flexible, there are still limitations on the types of assets that can be held within the account; for example, holding a life insurance policy, artwork or other collectibles is prohibited. But did you know that it’s also possible to use some or all of your IRA savings to invest in your own business? Here is some advice on how to use your IRA to fund your small business.

  • The basic procedure to using an IRA for funding is to first set up a new 401(k) plan for your business. Most brokerage and investment firms, including many discount brokers, can assist you in doing this quickly and inexpensively.
  • The next step is to rollover your IRA assets into your newly created 401(k), and use these funds to purchase shares of your company, since 401(k) plans are legally authorized to purchase company stock. After this transaction the company has the funds that were converted, and your 401(k) account holds shares of company stock.
  • If you have other employees that are participating in your 401(k), then the option to purchase company stock must be made available to them as well. If you don’t want your employees to have the option to purchase company stock, then this financing technique won’t work for your company.
  • Keep in mind that while this technique can provide your small business with valuable startup or working capital, it’s important to understand the risk of placing a significant amount of your retirement savings in any single asset, even if that’s the stock of your own company.
  • In addition, there are a number of requirements that you need to meet in order to avoid running afoul of the IRS. For example, when your 401(k) purchases the stock of your company, the stock must be fairly valued. This can be very difficult if your company is young (and can be expensive if you need to hire an outside expert to provide an objective analysis and valuation).
  • Note that if you begin investigating the details of using an IRA to fund your business, you might also find references to “self-directed” IRAs. A “self-directed” IRA is an IRA where a trustee (such as a bank, or other qualified entity) administers the account, and carries out the instructions of the account owner. There are a number of restrictions on the activities of self-directed IRAs, the biggest of which is that there cannot be any “self-dealing” within the account. This means that the IRA investments cannot directly benefit the owner in the present, so you cannot use an IRA to finance your business directly.

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    One Response to “Use Your IRA to Fund Your Small Business”

    1. retire forum says:

      retire forum…

      […]Use Your IRA to Fund Your Small Business | Retirement Advice |[…]…

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