Using Your SDIRA to Fund Your Business

July 24, 2019 Blog No Comment

Business as usual, or is it? Recent reports find that 27 million Americans are starting or running new businesses. You may not think entrepreneurship is an attractive career option for you or you may be wondering where you would find the capital to undertake such an endeavor. With an estimated $11 trillion dollars in IRA’s (in 2019), your retirement account could be the answer!

The IRS restricts only a few specific investment asset types. These investments include collectibles, life insurance, S-Corporation stock and investment transactions with disqualified persons. Self-Directed IRAs CAN invest in corporations, LLCs and LPs. But is it really that simple? The answer is YES and NO!

Let’s review the ‘yes’ answer first. Since there are such few investment restrictions imposed by the IRS, investment options through an IRA are almost limitless. For example your IRA can own LLC membership or LP interest in a technology, manufacturing or other service business or restaurant partnership business. Just think of the possibility of increasing your retirement dollars exponentially by investing your IRA in an operating company that owns a successful restaurant franchise! Why not put your retirement dollars to work for you? By the time you are of retirement age and are required to begin taking distributions from your account, you could have a significant amount of cash to sustain your current lifestyle.

According to IRS rules and regulations, if the IRA owner or disqualified persons are not owners by 50% or more or are not employed or serve as an officer or director receiving compensation then the IRA can invest into the LLC, LP, or corporation without having to be concerned with the prohibited transaction rules. So then, if the company is owned 49% or less by the IRA owner or disqualified persons then it is acceptable for the IRA to invest in the company. The key is to make certain ownership percentages are clearly outlined and acceptable by the IRS.

The ‘no’ answer is bit more complicated but absolutely attainable.

An IRA cannot purchase shares/units of a company owned 50% or more by disqualified persons. Disqualified persons include the IRA owner and certain family members. It is important for the IRA owner to understand prohibited transaction rules as it applies to self-directed IRAs and consider any tax issues that may arise. Proper due diligence before investing is imperative.

An IRA also cannot buy or sell shares to/from a disqualified person. For example, you have an IRA and your son owns 25% of a technology start-up company.  Even though your son only owns 25% of the company personally, he cannot sell his shares to your IRA because he is a disqualified person to the IRA. However, your IRA could purchase the shares of another owner who is not disqualified.  Coincidentally, if both your mother and your father each own 25% of the company then your IRA would not be able to invest in the Company as the combined ownership of both disqualified persons is 50%.

IRA Investors can ask and answer a few simple questions to determine the viability of investing in a private company: Is the seller of the shares a disqualified person? Do disqualified persons own 50% or more of the company?  The answers to these questions could unlock the door to funding a very successful new business!

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