Can I Use A Self-Directed IRA To Invest In My Company? Are there any limits to the ways in which I can use the funds in my SDIRA? Can I use the money in this account to invest in my partner’s business? In today’s article, we shall be addressing these questions, in a bid to help you understand what you can or cannot use your self-directed IRA (SDIRA for). If you are interested in finding out more, stay on till the very end of this article.
What is a Self-directed IRA?
Before we even get into the details of what you can or cannot do with a self-directed IRA, it would be great if we first established what it is. A self-directed IRA, popularly abbreviated as SDIRA is an individual retirement account in which the custodian allows the account owner to make the investment decisions, and to invest in a wider range of investments, provided that they are all allowed by the law.
An SDIRA owner can, for instance, invest in assets such as private company stock, precious metals, real estate, promissory notes, and other assets which are typically not allowed in other types of IRAs. The common question I get from investors whenever I tell them about SDIRAs is, “Why haven’t I heard of these self-directed IRAs, and why am I only allowed to invest in mutual funds or ETFs in my current IRA?” The reason for this is that most financial institutions in the USA that are authorized to administer IRAs do not perceive non-traditional assets as feasible investments.
They are more inclined to work with investors who are interested in holding conservative investments. This does not mean that the non-traditional assets are not worth holding, but just as is the case with other types of assets, they should not put all their eggs in one basket.
Investing using an SDIRA
As we have seen, an SDIRA allows you to invest in almost anything. Your options range from well-known mutual funds to racehorses to share ownership in start-ups. One thing that is, however, banned is self-dealing. This is when an investor uses their IRA to invest in their, or their spouse’s business before they begin to take their distributions.
You cannot use your SDIRA to invest in your business before the legally allowed time to start withdrawing the funds in your account comes.
In return for the IRS giving your IRA investments special tax treatment, you are required to keep them in your account, separate from your other assets that do not fall within your IRA portfolio. If you decide to use an IRA to get around this rule, the IRS will come knocking at your door, and this won’t be for a good reason.
Some classic examples of self-dealing include:
- Selling stock that you own to your SDIRA
- Using your IRA to purchase a vacation home
- Investing in your business
Using your self-directed IRA to do business with your spouse, children, or your parents is also perceived as self-dealing, and can also lead to the IRS coming after you.
Does this mean that I cannot use my Self-Directed IRA to invest in businesses?
No. The IRS does not ban you from putting some of your SDIRA money into businesses, including the ones you and your spouse may be shareholders in. You are, however, not allowed to put SDIRA money into a business that your spouse already owns more than 50% of all the stock. You can also not pour the money into your spouse’s sole proprietorship.
Generally, the IRS does not want you to put your SDIRA money in a business or company in which you can wake up and decide that you will increase your own salary without being questioned.
You will, as such, be safer investing in a company in which you own less than 50% of the entire entity, and are not the one controlling it. In other words, if you can get fired from the business, then you can invest in it without the IRS perceiving this as self-dealing.
What happens if the IRS catches you self-dealing?
There’s room for interpretation when it comes to your spouse owning a business and him or her being one of the many investors in that business. This is a gap that you can exploit, but you will need to consult your lawyer on this matter first.
If the IRS looks into how you invested your money and finds out that you have been self-dealing, then your Self-Directed IRA will automatically turn into a regular investment account. Say you have about $500,000 in your Self-directed IRA and the IRS catches you self-dealing, your account will automatically lose the tax-protected status. This means that at the end of the year, you will have to declare the $500,000 as taxable income!
Some considerations to make
If you suspect that you may be close to self-dealing, experts recommend that you split up your investments. You can, for instance, decide that you will use your savings amounting to $200,000 in an IRA ($100,000), and the rest in a separate account ( personal investment account). Doing this will ensure that the losses are minimal, if or when you cross the line.
If your plans involve purchasing stocks, you may be better off using a taxable account. This means that when the time comes for you to sell the stock, you will pay capital gains tax. The profits earned from an individual retirement account are usually taxed as ordinary income, to means that one pays a higher tax rate than if their profits were viewed as capital gains.
Frequently Asked Questions on “Can I Use A Self-Directed IRA To Invest In My Company?”
1. What can assets can I invest using my self-directed IRA?
Some of the most popular investments that you can hold in your self-directed IRA include:
- Real estate
- Precious metals e.g. gold, silver, palladium, and platinum
- LLC interest
- Trust deed lending
- Promissory notes
The IRS essentially allows you to use your SDIRA to invest in almost everything, with the exception of a few assets.
2. Which assets are restricted from self-directed IRAs?
Under the Internal Revenue Code, investors are prohibited from investing in the following assets:
- Collectibles e.g.antiques, stamps, art, collector coins, alcoholic beverages, etc.
- Life Insurance
- S-corporation stock
3. Can I get a loan to purchase real estate using my IRA?
You can purchase real estate using the money in your IRA, or you can use a loan/mortgage to achieve the same objective. Whenever you leverage your IRA with debt, however, you must proceed with the knowledge that:
- The loan you take through an SDIRA needs to be a non-recourse loan. Such a loan is made by the moneylender against the asset and is structured in such a way that in the event of a default, the lender forecloses or takes over the asset. The lender doesn’t pursue the self-directed IRA or the owner of the SDIRA for such defaults.
- Your Self-Directed IRA may be subject to a tax that is referred to as an unrelated debt-financed income tax ( UDFI/UBIT).
4. If I want to invest in businesses, can I roll over my current retirement plan into a self-directed IRA?
Yes, you can. The IRS allows those who have the following retirement plans to roll over their funds to an SDIRA:
- 401(k) with a former employer – Note that if it is a Traditional 401(k), it will be rolled over into a Traditional S-DIRA, and if you have a Roth 401(k), it will be rolled over into a self-directed Roth IRA.
- Traditional IRA
- Roth IRA
Note that most current employers will restrict you from rolling over your funds out of the plan, with the exception of special circumstances such as in-service withdrawals.
Also read our other posts on precious metals, retirement investments, and other related subjects:
Also read: What is a 401(k) to gold IRA rollover?
That will be all for this article in which we have addressed the question “Can I Use A Self-Directed IRA To Invest In My Company”. I hope that you found the article very helpful and informative and that you know how to go about investing in businesses as a self-directed IRA owner. There are many more articles on this website about self-directed IRAs and how you can use them to achieve your financial objectives for your retirement years, so you can take a moment to explore what we have for you. If you also have any questions about today’s article, do let me know so that I can share more resources with you.
I wish you well,
Eric, Investor and Team Member at Gold Retired!