Using Your IRA to Start or Grow Your Business

Do want to start a new business using funds in your IRA? Here's how.
You can use your IRA to fund your small business.

Do you have an individual retirement plan? Chances are, you do. Many retirement account owners have either a 401(k) from a current employer or an Individual Retirement Account (IRA). Whichever you have, making smart investment decisions is critical to your financial success in life, and your retirement investment strategy certainly falls into that category.

It’s also important to read your financial statements and know how many dollars you have in retirement plans and how you can use them. Perhaps you have sufficient funds and you want to purchase or start a new business and aren’t sure if you can use your IRA. Keep reading to find out the answer to that question and more. When it comes to business funding, the more you know up front, the better. 

What Are IRAs? 

IRAs are a smart tool for saving and growing your financial assets. That’s because you get tax arrangements for your retirement funds when you put them in an IRA. In fact, if you ask a financial planner, you’ll likely hear that IRAs are 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 advisors. As you may guess, it’s critical to use your retirement assets in a way that does not incur a tax penalty, or withdrawal penalty, to you or your business entity. You want funding without penalties for your business. 

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

Answer: not technically. But there are ways you can use or “take” money from an IRA account that don’t trigger a taxable event or early withdrawal penalty. You just need to know the transaction rules from the Internal Revenue Service. 

One way you can take a loan from an IRA to start a business is to roll the IRA’s funds into another type of retirement account, which you can do through methods like Rollovers for Business Startups (ROBS) or a 60-day distribution. Another way is through the use of a self-directed IRA. There’s often confusion between IRAs and 401(k) plans because most 401(k) plans allow you to borrow from your account via “participant loans.” In other words, 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 your business ventures. You just need to know about the types of transactions and how to gain your funding without penalties. 

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. We’ll start with prohibited transactions. 

What’s a Prohibited Transaction?

The short answer? It’s a bad idea. The longer answer? 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 or financial institution 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). You want to avoid this scenario, which is why we’re going over it in detail. 

Examples of Improper Uses of IRA Funds:

  • Taking a loan from the IRA
  • Using IRA funds for a real estate purchase (this includes a rental home or other rental properties)
  • 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 need to know the rules for IRAs. 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 private 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 as Business Startups (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

First, you need to establish a C Corporation. Then, that C Corporation establishes a retirement plan, usually a 401(k). Next, the existing retirement funds are rolled into the new 401(k). The 401(k) can then purchase C-Corporation stock. From there, the new C Corp can start a business or fund a franchise.

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 a down payment on a small business loan. 

ROBS funding allows new and seasoned small business owners to use their personal funds in 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 who is able to draw a salary.

For prospective business owners looking to utilize the funds in an IRA to grow their business while also continuing to grow their retirement funds, learn more about ROBS funding today. It’s a smart business idea to use your retirement account funds from your IRA to start your business with ROBS!

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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