Raise Money Using a Self-Directed IRA

This article was written by Asheesh Advani of Entrepreneur.com. Asheesh is Entrepreneur.com's "Start-up Financing" columnist and president of CircleLending, a financial services company that facilitates loans among friends, relatives and business associates.

If you believe in your business and think it has the potential to be a long-term success, why not make an investment in it using your retirement plan? Can it be done? You bet it can, using a so-called "self-directed IRA."

To be clear, this isn't the same as borrowing from your 401(k) or your spouse's retirement savings. In previous columns, I have cautioned entrepreneurs against borrowing heavily from retirement assets. Instead, raising money by using a self-directed IRA is the opposite; it involves putting your company's stock into a retirement plan to protect its capital gains. In my opinion, self-directed IRAs are an underappreciated tool for allowing entrepreneurs -- and their friends -- to invest retirement funds into a start-up.

As always, take care to do it right and to not cross the IRS. But investing funds from your self-directed IRA into your business is a viable and potentially wise alternative you should consider. In fact, your siblings, friends and business associates can also invest in your business from their retirement funds and ensure their capital gains get favorable tax treatment. This could make an otherwise break-even investment proposition seem more attractive.

In addition, it could make your investors more patient by extending their investment horizon to their retirement years, which is a huge benefit from your perspective. Experienced entrepreneurs will tell you that patient investors are a hard-to-find treasure. By suggesting self-directed IRAs to potential investors that you're in discussions with, you can increase the chances that they close and that they become your long-term financial partners.

Here's how it works. Move your IRA funds into a self-directed IRA. Pensco Trust Company is one firm that does this. (I've mentioned more at the end of the article.) Then, direct your IRA to make an equity investment in your business.

Pensco has a success story of a young entrepreneur who put $1,800 into a self-directed IRA and, along with some friends who also invested their modestly funded IRAs, formed a company. The company grew rapidly, was acquired three times and finally went public, returning $38 million to the founder's IRA -- not a shabby nest egg to have sitting in a tax-free IRA.

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