Yes, You Can Use Your IRA to Start or Grow Your Business

IRAs are a great tool for saving and growing your retirement funds. They’re also among the more flexible forms of retirement saving methods. But because there’s room for interpretation of what you can and can’t do with the cash in your IRA, there’s often confusion and misinformation, even among certified financial planners – especially when it comes to using your IRA to start a business.

Can You Take a Loan from an IRA to Start a Business?

Not technically. But there are ways you can use or “take” money from an IRA account that doesn’t trigger a taxable event or early withdraw penalty.

One of those ways is to roll the IRA’s funds into another type of retirement account, which you can do through methods like a Rollover for Business Start-ups (ROBS) transaction or a 60-day distribution. Another way is through the use of a “self-directed IRA.

A 60-day distribution lets you remove money from your IRA without taxes or penalties – but only if you return the same amount of money to the IRA or another retirement account within that 60-day period.

There’s often confusion between IRAs and 401(k) plans because most 401(k)s allow you to borrow from your account via “participant loans.” You can use the money borrowed from your 401(k) for any purpose, but you can only borrow the lesser of up to 50 percent of your vested account balance or $50,000. There might also be a relatively short repayment term. IRAs don’t allow participant loans, unlike 401(k)s and other plans such as 403(b)s, 457 plans, other types of profit-sharing plans, or as a defined benefit of a pension.

So, in short, you can’t take a loan from your IRA for any reason including starting a business. But there are still ways you can use the money in your IRA to start a business.

Can Your IRA Invest in Your Business?

Since there’s a fair amount of confusion regarding how you can invest your IRA funds, let’s break down some commonly used terms that get tossed around when trying to understand IRA business funding.

What’s a Prohibited Transaction?

A prohibited transaction is the improper use of IRA funds by the owner, which means you or the beneficiary of the plan, not the company that holds the IRA. If a prohibited transaction occurs, the IRA assets are treated as if they were distributed as of the first day of that year. The consequence of the prohibited transaction may be a taxable event, an additional tax on the amount involved, and early withdrawal fees (if you’re under the age of 59 ½).

Examples of improper uses of IRA funds:

  • Taking a loan from the IRA
  • Using IRA funds to purchase property for personal use
  • Using IRA funds to secure a loan
  • Paying too much for IRA plan management

What’s a Self-Directed IRA?

If you’re a hopeful business owner researching how to use your IRA to start a business, you’ve probably already seen the term “self-directed IRA” pop up. Self-directed IRAs are a passive investment vehicle that can be used to invest IRA funds in a business – but in most cases, not in your own business.

Tailored Funding Options for You

If you use a self-directed IRA to invest in a business, you can’t be involved in running the business because this is considered interacting with the plan assets, which is a prohibited transaction. Self-directed IRAs also don’t let you draw a salary from the business. You’ll never be able to possess more than 50 percent individual or personal ownership in the business.

You Can Use Your IRA to Start a Business with ROBS

Using an IRA to buy or fund a business is not a prohibited transaction as long as you use the correct vehicle for that money to fund the business. If you want to use an IRA to start or buy an active business, Rollovers for Business Start-ups (ROBS) is a strong option.

ROBS is not a loan or a self-directed IRA, and it does not trigger a taxable event. It’s also important to note that ROBS is not a tax loophole — it’s a legal way to fund a business using your retirement funds. Here’s a look at the steps that make using an IRA to start a business possible via ROBS funding:

graphic visualizing the rollover for business start-ups process

Once the ROBS process is complete and the business is funded, the money can be used for almost any business purpose. Unlike typical IRA investing or self-directed IRAs, the money from ROBS funding can be used to fund a start-up, purchase an existing business or franchise, or even be used as the down payment on a small business loan.

ROBS funding allows new and seasoned small business owners to use an IRA to fund a business without having to worry about prohibited transactions or loan payments. And because you’re not working within the rules and regulations of self-directed IRAs, you can launch a fully operating active business as an owner that allows you to draw a salary.

If you’re looking to utilize the funds in an IRA to grow your business while also continuing to grow your retirement funds, learn more about ROBS funding today.

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Want to Use ROBS to Start a Business?

Our step-by-step Guide to Rollovers for Business Startups is a complete handbook of everything you need to know about using ROBS to start or buy a small business or franchise.

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