Can you use that IRA to invest in a business?
Q. Can I use an IRA to invest in a new business without taking the money out of the account?
A. Capital is paramount when you’re starting a business.
When you look at your resources, it makes sense that you’d see your IRA as a possible source of capital.
“It would seem, at first blush, that this is a great idea,” said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence. “The money, after all, is yours.”
And, she said, your own business venture is not on the list of prohibited investments. She saidlife insurance, certain derivatives, real estate, coins and antiques/collectibles are all no-nos in IRAs.
So, are you in the clear then? Fusillo said the answer is a definite no.
“Not only are there prohibited investments in IRAs, but there are also prohibited transactions, which we tend to hear less about,” she said. “These include taking a loan from your IRA, using it as collateral for a loan, or buying personal use property with IRA funds, to name a few.”
The bottom line is if you use IRA money to invest in a business, it will be considered a prohibited transaction and the IRS will consider the funds used as a distribution to you, Fusillo said.
“At that point, regular income tax rules will kick in, as with any regular distribution,” she said. “In addition, if you are under age 59 ½, you may be subject to a premature distribution penalty on the funds used.”
Seems like you need to go back to the drawing board. Good luck!
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Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.