Starting a Self Directed IRAPosted on September 23rd, 2010 William No comments
In previous posts, we've mentioned that borrowing money against your retirement plan is generally a very bad idea. A self-directed IRA is something different: it allows you to use your retirement funds to invest in your business. Why would you want to do this?
Using a self-directed IRA to avoid capital gains
As we've discussed, the nice thing about a Roth IRA is that your money grows completely tax-free; thus, it's a particularly good vehicle for income sources that would otherwise be heavily taxed. If you're working hard on your business and growing it rapidly, you may be seeing a large return on your investment, which you're then taxed on. If your Roth IRA owns most of the business stock, then not only did that give you access to your IRA funds for business capital, but the return from your business will be tax-free!
Of course, this does mean that you can't touch the money until you retire, so be sure to keep enough income coming your way to live on!
Avoiding trouble with the IRS
The IRS wants to make sure that your IRA really is using to save for retirement, rather than just for avoiding taxes now. To avoid trouble with them, read through the list of prohibited transactions and be very careful to avoid anything on it, as breaking the rules here can result in losing the tax-favored status of your account! Among other things, this means that your parents, children, and spouse are not permitted to invest their IRAs into your business (although your friends and siblings can). Also, you may not borrow money from the account, sell property to it, or use it to buy things for your own use. You're also not allowed to own more than 50 percent of the business you invest in, and you shouldn't invest in an S corporation or general partnership. If you don't have a business yet, you can also use your IRA to buy one, although this may subject you to the unrelated business income tax.
One nice thing about having people invest in your business through an IRA is that the structure of the retirement plan discourages them from pulling out their investment early, which can be a big help for your business. A self directed IRA does require that you use a special custodian; depending on where you set up your retirement account, your custodian may limit you to certain types of investments (mostly ones the bank sells) or may allow you to invest wherever you like and simply handle the record keeping.
For more information on self-directed IRAs, refer to section 408 of the internal revenue code.