Raise Money Using a Self-Directed IRA

The trick is that the IRS is serious about IRAs being used to build funds for retirement and is on the lookout for schemes to use IRAs to enrich your life now. So take note of these complicated and important rules:

• Don't investment in S corporations or in a general partnership. This is simply because of the tax definitions of these legal structures.

• Respect the list of "prohibited transactions." While friends, business associates and siblings may invest in your business via a self-directed IRA, your parents, children or a spouse may not.

• You can't be the key employee and key investor in the business. You can't own more than 50% of the business in which you invest, and you can't have a controlling interest in the company. Basically, someone else has to have the right to hire or fire you. The IRS wants to make sure you aren't "self-dealing," or moving retirement funds in a way that might benefit you in the present through a salary or other immediate payments.

If you're not the start-up type, you can also buy a business with your IRA. The business is then subject to a tax called the unrelated business income tax, since IRAs are otherwise tax-free. But your equity position still appreciates in your IRA tax-free.

However, you do it, putting some of your retirement funds into a business that you already plan to pour your time and effort into is yet another way your sweat equity can pay off in the long run.

There are fairly detailed tax and securities laws involved with this, so consult with trusted experts in the field. For example, Tomer Tal at New Venture Attorneys and Pensco offer free information and webinars on this topic. Keep in mind that you must use a special custodian to manage your self-directed IRA. A handful of companies specialize in this and maintain Web sites with educational resources, webinars and blogs to get you the latest information on the topic. They include:

• Pensco Trust Company
• Trust Administration Services
• Guidant Financial Group
• Equity Trust Company

For my company, I successfully raised money from a handful of early investors who purchased stock using self-directed IRAs. I found that these investors had a long-term investment view and were cooperative and patient. This tool has helped me raise money, and I hope it can do the same for you.