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Raising business capital: How a self-directed IRA can help

A self-directed IRA allows an investor to choose which money from his or her retirement accounts are invested.



Have you ever wanted to use your retirement portfolio for investments that really matter to you? For instance, you may be interested in an upcoming business or have one of your own that you want to invest in. However, all of your savings are sitting in your IRA!

With a self-directed IRA, you can choose where money from your retirement accounts is invested, and continue to enjoy tax-free or tax-deferred growth. Since these accounts offer more flexibility, they are a good option for those looking to fund a startup, grow their own business or buy a company.

Benefits of a self-directed IRA

Here’s why you should consider using a self-directed IRA to invest in a business:

  • Tax-Advantaged Growth – A self-directed IRA offers either tax-free or tax-deferred growth. With a traditional IRA, income and gains will be tax-deferred since these accounts are funded with pre-tax dollars, while Roth IRAs give you tax-free gains since you’ve already paid income tax on contributions.

  • More Options & Control – Self-directed IRAs allow you to make investments in a wider range of asset types, since you aren’t limited to stocks, bonds and mutual funds. These accounts can be used to invest in everything from real estate, precious metals and tax-lien certificates to certain business types.
    The main advantage isn’t just that you can invest retirement savings in your business, but that friends, colleagues and certain family members can invest in it with IRA savings as well.

Self-directed IRAs gives investors more control over where they want to invest their money in. This would usually include precious metals or real estate. (Photo by DepositPhotos)

Self-directed IRA investing: What types of investments can you make?

Since IRAs are primarily designed to help you save for retirement, you may be penalized if the IRS suspects you’re using retirement accounts for benefits in the present instead of the future, such as a salary paid to yourself.

You can use your self-directed IRA to invest in:

  • Private Businesses – Your retirement savings can help you set up a private business, or raise funds by suggesting that investors use self-directed IRAs.

  • Existing Companies – Self-directed IRAs can be used to buy existing companies. You will pay “unrelated business” income tax, but equity growth is tax-free.

  • Alternative Assets – Self-directed IRA owners can invest in a private company, franchise, closely-held enterprise or other allowable alternative investment.

Here are three basic situations to avoid:

  • General Partnership/S Corporations – These legal structures may seem the same as other companies, but they are governed by specific taxation rules.

  • Prohibited Transaction Types – Your spouse, children and parents cannot invest in your business with a self-directed IRA, but siblings, business associates and friends can.

  • Key Investor and Employee – If you own more than 50% of a business or have a controlling interest in it, you can’t use self-directed IRA funds to invest in it.

The bottom line is that you MUST check what’s allowed and what isn’t. Even a small error can lead to major penalties, so do your homework or consult an experienced financial advisor about applicable IRS rules and regulations.

(Featured image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, get in touch with Rick.