Buying a Business With Your Self-Directed IRAPosted on January 4, 2014 by
Stocks, bonds and mutual funds are all well and good – for those seeking ordinary returns. But if you have a particular expertise, or access to a lucrative market for just about any good or service, you have the potential to earn much more by going into business for yourself than you stand to gain by investing in the broad market.
Fortunately, your Self-Directed IRA doesn’t limit you to the mundane investments you read about in the papers all the time. In fact, IRA rules only restrict you from investing in a few things: life insurance, jewelry, gemstones, art and other collectables, alcoholic beverages, and some forms of gold and precious metals of insufficient purity or standardization. Other than that, the sky’s the limit on what you can own!
Owning a Business in Your Self-Directed IRA
By using your Self-Directed IRA to start or acquire a business, you are in control. Rather than hoping against hope the market will be kind to you this year, you can make things happen yourself. Want your business to grow? You can invest in advertising, new equipment, a new truck, more staff – whatever it takes to react to the current economic environment. Many of our clients find that investments like these often pay off far better than anything the same investment reasonably earns in the stock market, at least at an acceptable level of risk. This must be an arm’s length business, you can’t operate the business, and you can’t draw a salary from it.
Note: A business purchased by your IRA may be subject to unrelated business taxable income (UBTI); however, this tax can be avoided by structuring the business purchase as a C-Corporation.
I’m Concerned About Cash Flow. Can My Business Borrow, If Need Be?
The great news is that you are allowed to borrow money within a Self-Directed IRA to help your account grow. Any loans to your IRA must be on a non-recourse basis. Non-recourse means that in the event of a default, they can only seize the property used as collateral on the loan. They can’t lay claim to your personal funds, nor to other assets or funds within your IRA.
Important Notes: You cannot sign a personal guarantee when borrowing with your Self-Directed IRA. The portion you borrow may be subject to unrelated debt-financed income (UDFI), which falls under unrelated business taxable income (UBTI).
Anyone who owns a business within a Self-Directed IRA should be aware of a few restrictions on what you cannot do. You cannot lend to or borrow from your IRA or the businesses it owns. Nor can certain prohibited individuals – which means ascendants, descendants, their spouses, your financial and legal advisors involved in administering your IRA, nor their spouses, nor any business entities they control.
You also cannot use your IRA for self-dealing. This means your IRA can’t do business directly with you, the prohibited individuals described above, or any entities they control. You can’t, for example, own a real estate development company in your IRA, and then use a construction company you own to build houses.
The next step is making a call to American IRA, at 866-7500-IRA(472) to set up a free consultation about your goals and how a Self-Directed IRA may be the right tool for you. We look at your situation and objectives and help you decide if a Self-Directed IRA account is worth pursuing.