An often overlooked source of funding a business is through personal retirement accounts. Most people are not aware they can use IRA’s to fund businesses since most of the money made through IRA investing is through stocks, bonds, etc.


There are two ways to access retirement funds and we strongly encourage utilizing the services of an established firm as there is considerable risk if you do this wrong. Several rules and regulations apply to using retirement funds for an IRA and the IRS wants to be sure people aren’t using them improperly. There is a lot of grey area for funding businesses this way and as such there are several hucksters that could jeopardize your retirement benefits because they aren’t properly following the law.


One way to use a retirement account to invest in a business is through a self-directed IRA.


A self-directed IRA is an account held with a company (similar to Etrade or other investing firm) but instead of investing in stocks or bonds you invest those funds in a business. You can invest in many things with a self-directed IRA as long as they are not prohibited by law. Currently you cannot use a self-directed IRA to invest directly in collectibles, art, rugs, antiques, metals other than gold, silver and palladium bullion, gems, stamps, coins (except certain U.S.-minted coins), alcoholic beverages, and a few other tangible items related to personal property.


There are some things to be aware of if you plan to fund a business with an IRA.

– Can’t pledge the assets in the IRA as collateral for a loan. If additional funds are needed, the IRA cannot be pledged and the IRA, not the individual) will have to borrow money from other sources. The only loans IRAs are allowed are non-recourse loans, which means there is no personal guarantee for the money being borrowed. As you can probably guess, these funds are very hard to get.
– Self-directed IRAs are intended to be passive investments and the IRA account holder cannot actively manage the business.
– Since the IRA owner cannot actively manage the business, they can’t take a salary.


This makes the use of the self-directed IRA appropriate for a limited number of people, however there are a lot of firms saying self-directed IRA’s are a good choice for funding a business.


A second way to invest in retirement accounts and is often a better and more flexible choice is the Rollovers as Business Startups (ROBS). Like the self-directed IRA, you can use retirement funds to fund a business, but unlike the self-directed IRA where the account holder could not actively work in the business, the ROBS must be involved in the business as a bona fide employee.


Some other requirements of the ROBS plan:

– Business owners can pay themselves a salary as compensation for their work – as long as it’s deemed “reasonable.”
– Funds from ROBS can be used as a down payment on a loan. Many entrepreneurs use other forms of small business financing (i.e. – SBA loans, unsecured credit, etc.)


While self-directed IRAs can be a good option for those won’t be directly involved in running a business (more common for real estate investors) the rules and regulations make using a self-directed IRA unfeasible. The ROBS plan is more targeted to owners that want to be involved with the business.


Regardless of which one is right for you, be sure to consider that using retirement funds to finance a business comes with significant risk because if the business fails, you will be risking your retirement savings.