A Real Estate IRA tends to be the most common investment made with self directed IRAs. However, your IRA funds may also be used to fund a business. While funding a business is not considered a traditional investment like a real estate IRA or stocks and bonds, it could prove to be profitable nonetheless. A couple of options available to you include: starting your own business, investing in an existing business or buying a franchise. The control over your funds that comes with managing your own IRA allows you to make your purchase quickly. Additionally, you could use the tax exempt and/or tax free profits (depending on your type of IRA) made from your business to further fund your retirement account.
Although investing in a business using funds from your self directed IRA is not as traditional as other forms of investment, the rules for prohibited transactions still apply. Failing to adhere to rules regarding prohibited transactions could result in tax penalties. Investing in an entity that you already own more than 50% of in partnership, or any entity belonging to a spouse, parent, child or grandchild is considered a prohibited transaction. In order to avoid making a prohibited transaction, you're required to use an IRA custodian to assist you with staying in compliance with IRS regulations. Custodians for self directed IRAs help with fund disbursement and IRS compliance but do not give investment advice. Should you decide to use funds to invest in the business of a sibling or friend, for example, you could transfer funds from a 401k or existing IRA into a self directed IRA, choose a plan made especially for your business investment, make your investment and collect profits for your retirement account.
Some examples of business plans that can be funded by your self directed IRA include: Roth Solo 401(k), which has many of the same tax benefits as the Roth IRA (tax deductible contributions and tax free withdrawals); Savings Incentive Match Plan for Employees (SIMPLE), a great choice for investors with meager income ($45,000 per year or less) who are investing in very small businesses (less than 100 employees). The SIMPLE plan includes tax deductible contributions and tax deferment until a withdrawal is made. If you do not want to invest directly into the business, you also have the option of making an IRA loan. Before making any investments, make sure that you speak to your accountant or tax advisor about Unrelated Business Income Tax (UBIT).
Any expenses associated with maintaining the business can be written off on your taxes. Keep in mind that even if you make profits from your investment, they may not be used for personal use (i.e. you may not work for the business or collect an actual salary). Investing in businesses is yet another excellent way beyond a real estate IRA to use the freedom associated with self directing. Your unique experience, business savvy and creativity can help pave the way to a comfortable retirement.
For more information regarding Real Estate IRAs, please visit IslandViewMortgage.com