Using Your 401(k) or IRA Rollover Assets to Buy a Business

If you can control your retirement assets, you can invest them just about anywhere. Assets that you can control include individual retirement account funds, rollover IRA funds and funds that get rolled over from a former employer's 401(k) or 403(b) plan. Once the money is under your control, you can place it in a self-directed IRA account and then use it buy buy gold, real estate or even a business. Along the way, you'll have to follow the rules set out by the Internal Revenue Service.

Self-Directed Accounts

The key to directly investing your retirement funds in a business is to open up a self-directed account. Self-directed IRAs and 401(k)s are similar to regular accounts but with one key difference. These accounts don't impose limits on the types of investments you buy. Instead, they let you tell the custodian what to buy, opening up the full range of allowed investments. Basically, you can buy any investment you want as long as it isn't life insurance, collectibles or shares of an S corporation.

Investing in a Business

Investing in a business in a self-directed account is as straightforward as making any other investment. Whether you're buying stock in the business or making a loan to it from your retirement funds, you start by working out an arrangement with the business owner. Once you have an agreement, your account's custodian sends the funds over and makes the investment. Any returns from the investment go right into your account as do the proceeds when you sell your stock or when the loan gets paid off.

Self-Dealing Rules

When you or an immediate relative -- such as a father, grandfather, spouse, daughter or granddaughter -- own the business, you run the risk of falling on the wrong side of the IRS's prohibition against self-dealing. When you or a close family member benefit from the money in your IRA, it's considered self-dealing, and could lead to your account being disallowed and to you having to pay taxes and penalties. While it is possible to support your own business, it'll have to be one that you don't control. As long as you own less than 50 percent of the entity and don't control it -- in other words, if you can get fired -- the investment should be allowed.

Self-Directed 401(k)

When you're serious about investing in a business -- whether it's your own or someone else's -- a self-directed solo 401(k) plan may be a better option. Setting up your own 401(k) doesn't just give you higher contribution limits -- it also gives you more control. While you can't run your own business in a 401(k) plan, you can borrow from it. The ability to take a loan of up to $50,000 or half of your 401(k)'s funds, whichever is less, lets you use your 401(k) money as seed capital for your own business. When your business is profitable, you can repay the loan and sock more money into the 401(k) account.

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About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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