29 Sep Can my IRA invest in a business?

Q. Can I use an IRA to invest in a new business without taking the money out of the account?
— Hoping

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 said life insurance, certain derivatives, real estate, coins and antiques/collectibles are all no-nos in IRAs, although there are some exceptions.

Among the coins allowed are proof and non-proof of American Eagle coins, American Gold Buffalo coins, American Silver Eagle, and also Austrian Gold Philharmonics coins and Canadian Maple Leaf coins

“In order to be allowed to be held inside an IRA, coins must be very pure in their mineral content and not seen as a collector’s coin,” she said. “Krugerrands and the old Double Eagle gold coins are disallowed because they do not meet this standard.”

But gold coins that the IRS determines to have more actual currency value than collection value may be permissible, she said.

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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This post was first published in September 2016.