Using IRAs to Start a Business


Starting a business takes money. If you have an IRA, you may have a revenue source already on hand to fund your start up.

If your new business suffers initial losses, you can offset the tax penalty for withdrawing IRA funds with the business tax deductions you get for spending the money on your start up.

Be aware that if you have not reached the age of 59 1/2, you will be assessed a 10% penalty for early withdrawal of your IRA funds.

You can legitimately borrow from your IRA for sixty days, without penalty or interest. The Internal Revenue Service does, however, have a few caveats for this procedure. First, you must repay the money to your IRA within sixty days. Secondly, some of the funds you withdraw will be held as a tax deposit. So, if you borrow $10,000 from your IRA, you might actually receive only $8000, because the other $2000 is held as a tax deposit. You will have to repay the full $10,000 to your IRA, even if you only get $8000.

You need to be careful when borrowing against your IRA that you will be able to pay back the full amount, including the money the IRA custodian holds back as a tax deposit. You will not get this withheld money back until you file your income tax return.

You can also take sixty-day loans from your IRA repeatedly, as long as you meet the repayment terms. This means that rather than taking a $60,000 loan from your IRA and having to repay it plus the tax deposit within sixty days, you could take a $5000 loan from your IRA every month for a year.

In some cases, you can use the money in your IRA to invest directly in real estate. You will need an IRA trustee or custodian who approves of such investments, but they are not hard to find.

Please note that if you use your IRA money and a mortgage to purchase real estate, your IRA will have to file an income tax return. Also, your IRA will eventually owe income tax on its real estate investments because of “unrelated business income tax.’ When it comes to maneuvering IRA funds in this complex a plan, it is wise to consult a financial advisor.

It is not a wise idea to risk your IRA funds on any uncertain investments, however, if you can earn a considerable profit above your IRA interest and any applicable withdrawal penalty, you do have this reserve to draw from in order to take advantage of entrepreneurial opportunity.

When you plan to start your own business, you require more and more funds. You can take money from your IRA for such purpose. Here are some tips to use IRA effectively to satisfy your business needs offered by Chintamani Abhyankar.

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