Your IRA or solo(k) can start and fund a small business. Tax lawyers and co-founders of Directed IRA, Mat Sorensen and Mark Kohler cover the three common strategies small business owners should know when looking to start a small business with their retirement account funds. They cover using an IRA/LLC, utilizing a solo(k) or other 401(k) with a participant loan, and the Rollover on Business Start-Ups (ROBS) structure which includes a c-corp and a specialty 401(k). The right structure to use depends on the small business owner’s situation and there isn’t a one-size-fits-all strategy.

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Starting a Small Business with Your Self-Directed Account

Are you considering starting your own small business? Did you know that you can use your self-directed account to fund it? Self-directed accounts provide individuals with the opportunity to take control of their retirement funds and invest in a wide range of assets, including starting their own businesses.

One popular option is a Self-Directed Individual retirement account (SDIRA), which allows individuals to invest in a variety of alternative assets, such as real estate, private equity, precious metals, and even small businesses. This flexible investment option opens up a world of opportunities for those looking to pursue their entrepreneurial dreams.

Here are a few key points to consider when starting a small business with your SDIRA:

1. Evaluate your business idea: Before using your self-directed account to fund your business, it’s essential to have a solid business plan in place. Conduct market research, analyze the potential risks and rewards, and ensure that your business idea aligns with your skills and passions.

2. Consult with professionals: Starting a small business involves several legal and financial considerations. Seek guidance from professionals, such as attorneys and accountants, who can provide you with valuable advice on setting up the legal structure, tax implications, and compliance requirements for your business.

3. Understand prohibited transactions: While self-directed accounts provide individuals with vast investment options, it’s crucial to be aware of prohibited transactions. The IRS prohibits certain types of transactions, such as using your SDIRA to benefit yourself or your family members directly. Educate yourself on these restrictions to avoid any potential penalties or risk disqualifying your account.

4. Consider potential risks: Investing in a small business can carry inherent risks. It’s crucial to evaluate these risks and consider potential outcomes before using your retirement funds. Conduct thorough due diligence, assess your risk tolerance, and consider diversifying your investments to mitigate potential losses.

5. Seek assistance from specialized custodians: Opening a self-directed retirement account requires partnering with a specialized custodian who can administer your account and ensure compliance with IRS regulations. These custodians have expertise in handling alternative assets, including business investments, and can guide you through the process while ensuring all legal requirements are met.

6. Maintain separation between personal and business finances: It’s important to keep your personal and business finances separate. Your self-directed account should operate as an independent entity, making investments and incurring expenses solely on behalf of your business. Keep accurate records and avoid commingling funds to avoid any potential compliance issues.

7. Monitor and review your investments: Once your self-directed account is funding your small business, it’s important to regularly review its performance and ensure it aligns with your goals. As with any investment, your business’s success may fluctuate over time. Stay informed, adapt as needed, and make any necessary adjustments to protect your retirement savings.

Starting a small business can be a rewarding and exciting endeavor. By leveraging your self-directed account, you have the opportunity to finance your entrepreneurial goals while benefiting from potential tax advantages and the ability to diversify your retirement investments.

However, it’s crucial to thoroughly understand the rules and regulations surrounding self-directed accounts and to seek professional guidance throughout the process. With careful planning, due diligence, and the right support, you can embark on a successful small business journey while safeguarding your financial future.