Can I Use My IRA to Invest in a Startup?

Utilizing retirement funds as funding for business ventures may be an attractive strategy. But entrepreneurs should carefully consider IRS regulations and any potential risks.

IRA funds may only be withdrawn tax and penalty free once an owner reaches age 59 1/2, although certain exceptions exist.

Self-Directed IRAs

Self-directed IRAs (SDIRAs) give investors more control of their retirement savings by investing in alternative assets. SDIRAs can be set up as traditional or Roth IRAs, SEP IRAs, SIMPLE IRAs or solo 401(k).

SDIRAs typically invest in real estate, trust deeds, mortgage notes, precious metals and debt-based financial instruments like loans or promissory notes. Additionally, SDIRAs hold shares in private companies like LLCs or partnerships.

Investment with a Self-Directed Individual Retirement Account (SDIRA) requires careful consideration to avoid breaking IRS regulations. You should avoid personally participating in the business, drawing salaries from it or owning over 50 percent of it; doing so would constitute a prohibited transaction and may violate IRS guidelines.

Before making any major investments with your SDIRA, it is wise to consult an attorney, accountant or independent professional for advice. Failing to comply with IRS rules could result in additional taxes, penalties and loss of tax-deferred status – potentially costly consequences!

Traditional IRAs

An Individual Retirement Account (IRA) allows you to channel pre-tax income toward investments that grow tax deferred until retirement. Your contributions may be tax deductible1, while earnings and distributions will likely be taxed when taken.

An Individual Retirement Account (IRA) allows investors to invest in various assets, from startup equity through crowdfunding platforms to real estate and more. You may even purchase alternative assets such as gold, cryptocurrency and precious metals on certain exchanges that work exclusively with self-directed IRA custodians.

Only an annual contribution maximum restricts an IRA investment, though those aged 70 1/2 must start taking minimum distributions (RMDs), though you may reduce them through rollovers from other retirement accounts into an IRA.

Roth IRAs

Investing in startups using your retirement account can provide access to tax-free income in the future, but there are different approaches you can take in doing so.

One way is to use your Roth IRA through Madison Trust to invest in startups outside Wall Street. This is an ideal option for investors that wish to broaden their portfolios beyond Wall Street.

An alternative approach for investing in startup companies would be using your IRA to purchase shares of privately-held firms that have the potential of growing more quickly than their public-traded counterparts.

However, this strategy may present its own set of unique challenges. In particular, it’s critical to understand the Prohibited Transaction rules pertaining to IRA-owned businesses in order to comply with Prohibited Transaction regulations and avoid breaking them. If possible, work closely with an advisor who can ensure you follow proper procedures when investing.

Rollovers for Business Startups

Starting a business can be challenging, and one of the primary barriers most entrepreneurs encounter is raising sufficient funding. To overcome this hurdle, an increasing number of entrepreneurs are turning to nontraditional financing sources like Rollovers for Business Startups (ROBS). Through ROBS, entrepreneurs can use funds in their retirement accounts as leverage against startup costs.

ROBS allows prospective business owners to use their retirement funds without incurring early withdrawal penalties when starting or buying into new companies. Money transferred from an existing retirement account is transferred directly into a newly formed C Corporation that then purchases stock in its target business entity.

Notably, ROBS solutions may expose your retirement savings should your business fail and may not be appropriate for certain industries such as real estate ventures and marijuana businesses. To gain more information about this funding solution, contact an adviser who can walk you through this process.

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