Self directed IRAs allow investors to use retirement funds to invest in alternative assets like real estate, private companies, precious metals etc. Investing in your own company with self directed IRA provides unique benefits but also has some major risks. This article will analyze the pros and cons, tax implications, rules and regulations around using self directed IRA to invest in your own business.
Significant tax benefits make self directed IRA investing in own business attractive
The biggest benefit of investing retirement funds into your own company is the tax advantage. Money invested and gains generated within the self directed IRA grow tax-deferred. At age 59.5, withdrawals are taxed as ordinary income but there are no capital gain taxes. This allows much faster compounding compared to taxable investments. Many entrepreneurs use this structure to fund new business ideas and startups that would otherwise need external capital or loans.
Strict rules about no self dealing with self directed IRA investments
While self directed IRAs provide flexibility on investment options, the IRS does impose strict rules against self dealing i.e. using retirement funds to invest in yourself for personal benefit. Any dealings should be at arm’s length basis. All transactions must clearly benefit the IRA first rather than the IRA owner. Punishment for breaching these rules can be severe – IRA gets disqualified and there are additional taxes plus penalties.
Possibility of IRA assets getting wiped out in case of business failure
Like any high risk investment, investing your self directed IRA in a private business comes with the risk of losing it all. Since IRAs have creditor protection, personal assets of the business owner are usually protected. But retirement savings themselves have no protection against business failure, lawsuits or claims. A total loss will set back retirement planning by decades for most people.
Use checkbook control IRA structure to simplify investing and accounting
Rather than directly holding private company shares, most people invest via a self-directed IRA LLC. Also called checkbook control IRA LLC, it adds a layer of liability protection and simplifies paperwork plus accounting a lot. All investment decisions still need self directed IRA rules compliance. But with checkbook control, initiating deals or managing existing investments becomes much easier operationally.
Self directed IRAs provide unique flexibility to invest retirement funds in alternative assets like private business, real estate, loans etc. Funding your own startup with such IRA does offer excellent tax deferral benefits but also has major risks. Strict no self dealing rules, high business failure rates and no asset protection for retirement funds make this structure suitable only for high risk tolerance investors.