In this spot in the past we have talked about various ways to fund your small business, especially if you find yourself without a lot of startup capital. Despite Small Business Association (SBA) inducements, banks are clutching their purse strings when it comes to loaning to small business owners, and credit cards are an expensive and often tricky way to finance a business. One trend that does seem to be on the rise, though, is financing your small business with a rollover IRA.
But is it a good idea?
Many new business owners only decided to start their business after a long time in the corporate world, meaning that they often have a lot of money tied up in a retirement account. Due to fees and penalties, that money can seem untouchable until retirement time, but did you know that with proper guidance many IRA’s can be used to fund your business start up with few or no fees and taxes associated with early withdrawal? It is possible, but experts disagree on whether not this risky proposition is such a good idea. Read on for both sides of the story.
According to a recent piece by financial columnist Ron Consolino of the Houston Chronicle, if you had a retirement plan and have since left the company associated with that plan, you will likely be able to use your accumulated funds for a business startup. Retirement funds can be diverted to:
- Fund a business startup
- Purchase a business franchise
- Buy an existing business
- Raise capital for an existing business (in some cases)
Said Consolino, in order to use the funds tax deferred and without having to pay any penalties, the funds must be rolled over into another IRA, this one for you and your business’ employees. The funds then become company assets, which can be invested in company stock and mutual funds. Your company can, in turn, raise money from the sale of stocks or the investments in the retirement plant. If this sounds complicated to you, it is because it is, and you should contact a qualified financial advisor before using your IRA to fund your new business.
On the other hand, back in 2007, the Wall Street Journal’s Kelly Spor warned against using a retirement plan for business funding. She describes the process as a loophole rather than an IRS-approved funding plan, and warns that the plan costs about $5,000 to set up, as well as costing about $800 per year in administrative fees.
Before you even think about using your retirement money to start up a new business, also consider the risks. Ask yourself the following questions before proceeding:
Would you need to invest your entire retirement, or just a portion of it? – Tying your money up in a startup is always going to be a risky investment. If you plan to use all or part of your retirement plan, be prepared for the worst – losing everything. Make using your IRA to fund your start up a calculated risk, not a foolhardy one.
Do you have a solid business idea? – Do you have a business plan? Have you done your market research and made sure there is a market for your products or services? Do you have a budget? Have you consulted small business professionals such as accountants, financial planners and attorneys?
Are you of an age where you will be able to replace the funds? – Financial advisors recommend different retirement plans for people of different ages based on their life expectancy, expected working years, and other important factors. Speak candidly with your trusted financial advisor before committing your IRA funds to a business.
Is there another option? There are many drawbacks to using your retirement savings to fund your business. You could lose everything, and even if you do not, the process is expensive. Other options include borrowing from your 401(k), but this is only an option if you still work for the employer that administers your IRA.
If you do not want the risk of financing with your IRA, check out these two posts about traditional and more outside-the-box ways to fund your new business.
We are interested to hear from anyone who has gone through the process of investing an existing IRA into a business? Were the risks and rewards worth the investment?
Similar Topics:
- These Entrepreneurs are Thinking Outside the Box to Raise Business Capital. How About You?
- A New Borrowing Option for Small Businesses: Micro Loans with Kiva!
- Did Your Small Business Grow This Year? It’s Probably No Thanks to a Bank
- Financing Your Business with a Credit Card? Think Again
- Writing a Business Plan for Your Small Business
What do you think?
Should you fund a business with an IRA?
It's possible, but should you? What are the pros and cons? Have you done this? Was it worth it?