IRA distribution to start business without penalty?

[KJ Judd]

New client called. He's looking to take money out of an IRA to start a business. I recommended to use other funds due to penalties. He said he read somewhere (don't you love those?) that there was an exception to start a business. Has anyone heard of this?

The only thing I could think of is I vaguely recall that if a plan is established a certain way that the retirement plan could loan money to the business. Of course, I can't recall where I have hear/encountered this in the past.

[Jesse]

Not from an IRA as far as I know. Perhaps some 401(k) plans allow for a loan against the funds? But not from an IRA. I would stay with your recommendation.

[taxmandan]

There is a company that advertises to arrange for doing this. But it is loan structured from 401(k) money not an IRA from what I saw on their website. Sorry I don't have the url, it's been a couple of years since I looked them up. I wasn't impressed with the idea, and their fees were really high for setting it all up for the client.

[joanmcq]

He may have heard about a self-directed IRA. But trying to put a business in a self-directed IRA is pretty much impossible if you want to be paid out of it.

[S T]

Several Plans

Try to google

ira monies to purchase business
or use IRA moneis to purchase business

Seems like there are several plans, the one Joan mentioned for self directed IRA, but also seems to be another one if the client starts a business as a C Corp, then opens a 401K and transfers the IRA into the 401K plan. Then I think they can loan up to 50% of the 401K plan.

http://answers.google.com/answers/threadview?id=786099

http://www.curtisfinancialplanning.com/article3_irabusiness.html

http://www.ersop.com/

A few links I found

Sandy

[JohnH]

The above references are good ones to give you an overview. There are several hoops to jump through (one of the main ones being the retirement plan owner can't receive any compensation from the business). I researched this for a client a couple of years ago, and after I finished my work I decided I wanted nothing to do with it.

The client was talking with one of the outfits that promote this sort of thing (one popular type of deal they promote is using the money to buy a franchise), and he kept calling me back asking me to check out some other aspect of the plan. I finally told him that if he went through with the deal he would need to get another accountant, because I didn't want to have anything to do with the transaction. One little slip-up unravels the whole deal and suddenly taxes & penalties are due.

Want to guess who everyone will try to tag with responsibility for the slip-up?

[DaveO]

I saw the 401K loan deal a while back

And like JohnH we passed on working with them. Problem was they asked for a referall and there wasn't anybody I disliked enough to send them to.

[joanmcq]

If you remember a while back these outfits were promoting buying a personal residence in a self-directed IRA. Audits occurred, & it was ruled you couldn't do that and all the transactions fell apart. the people that bought into it lost a bundle, and I can't remember if the promoters were prosecuted or if they just skipped town (or started promoting some other tax scheme)