Can You Use Your IRA To Start A Business?

Cash out IRA to start businessMany years ago I had met with a gentleman who was losing his job.

Instead of giving up and adopting the “woe is me” mentality, he had bigger plans.  He wanted to start his own business.

You go with your bad self! 

Note: I didn’t actually say this, but I was definitely thinking it.  I love it when people are willing to take risks and try new things.

One of those risks is something that makes most financial planner cringe.

This inspiring entrepreneur wanted to use his retirement account as funding to start his business.

Stuff like this makes most advisors uncomfortable in their seats.

I have to admit that I shifted a bit, too.

If you are thinking of starting a small business and wondering if you can get funds from an IRA to help fund your business, the short answer is yes. It is however, a complicated process and not one that many financial experts would recommend. It is not as simple as withdrawing the funds, as one might think. Here is a look at what you would need to use your IRA to fund your new business venture.

Living Your Dream

In order to use your IRA to start a business you must roll it over into a new IRA that will be established under your new start up company. It must be a qualified plan in order for the process to work and the new IRA account must be written so that is can be a holder of stock for the new company you are starting.

After you have rolled it over, you now must use the money in your new IRA account to buy stock in your new company. After that step is complete you can then use the cash to help with the start up costs of your business. Additionally, you should know that the cash you have taken out for business costs is non-taxable. This is because the shares are still in your account.

While this may seem like a fairly simple process, it actually is quite tricky. It is important to make sure you work with an experienced financial advisor to help you out with the transactions. Keep in mind that financial advisers are likely to charge hefty fees for these transactions and may continue to charge you annual fees as well.   There are also numerous other considerations in making such a move.

Considerations for Using Your IRA for Start Up Business

First, while the IRS has not yet considered these transactions to be illegal, they do look at them very carefully. There are compliance issues that you are supposed to meet and challenges that could occur if they were to look at stock valuation. If the IRS was to decide that what you did was in the wrong, they could issue a 100% tax penalty.
Using your IRA funds in this manner to start up a small business is really in a grey area and no one knows for sure when it may turn black and white. It is hard to know what the IRS will do next or when they will issue penalties or deem that what you have done is illegal.

If you decide to go ahead and use your IRA to help fund your new small business, you will want to tread on careful ground, as you could be putting your IRA at risk. You may instead want to look at other options that are considered totally legitimate. This could include using a home equity line of credit, getting a loan from a family member or even taking out a loan from your 401K at work, if you are still employed. You could also withdraw the funds from a Roth IRA, as long as the account is at least 5 years old.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

Creative Commons License photo credit: Jack Amick

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Comments | 3 Responses

  1. says

    To me, retirement accounts are for retirement and not for anything else other than possibly a dire emergency. Starting your own business is definitely a great thing if you have the motivation and the ideas and everything else needed to make it work, but I don’t see using your IRA or 401(k) or whatever else as a means to make that happen. I’m sure no business owner goes into their venture with the motivation to fail, but the fact is that many businesses will fail, and if that happened, this guy would be left with no business and no retirement. I just don’t see it as a good idea but then again my risk tolerance is pretty low.

  2. says

    Jeff,
    Thanks for the post. As a CPA with a tax practice it makes me “cringe” when clients have withdrawn money from their retirement to start a business and are shocked to pay the tax and penalty if under 59 1/2 years of age. This option empowers entrepreneurs with another choice and some times a best choice. Thanks for sharing.
    Now I need clients to come to me before making the withdrawal and see if I can get over to you.
    I do tax returns…not investments or plumbing services.
    Jeff Haywood, CPA

  3. says

    Very interesting. Never thought about using my IRA to fund my business (this could have been very helpful 3 months ago when I was looking for some funding).

    On another note, congrats on the growth of your site.

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