Are you searching for investors for your startup or business plan? Well, if you trust in your business idea, why not fund your business yourself? Is that possible you must be wondering. Yes, it is! You can raise money to fund your startup using a self-directed IRA.
This involves financing your company using your retirement account so that you can protect its capital gains. So, how is it done? In order to understand the process, you must first understand the difference between a regular IRA and a self-directed IRA.
Traditional IRA versus Self-Directed IRA
An Individual Retirement Account can be classified on the basis of the chosen custodian. Traditionally, the investments made through IRAs are controlled by the financial institution in which the account is held, and can only be made towards mutual funds, stocks, bonds and the likes. Due to such limitations, many retirement savers are leaning towards a ‘Self-Directed IRA’.
As the name suggests, self-directed IRAs allow individuals to decide their investment choices while opening up options such as real estate, startups, franchises, precious metals, etc. However, self-directed IRAs require you to hire a custodian who can assess alternative investment assets and provide the necessary record keeping services for these assets. Bear in mind that these custodians do not give you investment advice but rather provide oversight services.
How to Fund Your Business
1. First establish a self-directed IRA through a well-experienced custodian who is well-versed with the rules and regulations of such accounts.
2. Execute a roll over from the existing 401(k), 403(b), IRA or Keogh, to the self-directed IRA.
3. Next, you need to set up a Limited Liability Company (LLC) which will be managed by the IRA’s owner. This is legal entity for your business.
4. After which, you can initiate the purchase of membership units in the LLC by the self-directed IRA using the funds in the self-directed IRA
By structuring your investments in this manner, 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 IRS. The LLC can also borrow money, thus using leverage to increase returns. Additionally, it minimizes the number of transactions that need to be executed by the trustee, thereby lowering the overall cost of owning a self-directed IRA.
Since you are considering investing through your self-directed IRAs, bear in mind that the IRS is extremely vigilant in such cases. Mistakes made during the setup or management of the account can lead to payment of expensive taxes or penalties as a consequence. So, choose an experienced custodian who is well-versed with information pertaining to government rules and regulations and can provide administrative services such as maintenance of records, issuing client statements accurately. And lastly, as with any decision that involves accounting and taxes, be sure to consult your accountant and your lawyer before taking action!
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.