Using an IRA to buy a Business Tax-Free!

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July 5th, 2011

The legality of using retirement funds to purchase employer corporate stock or buy a business with an IRA is firmly established in the Internal Revenue Code and under ERISA law.

With a Self-Directed IRA LLC, an IRA holder cannot be actively involved in the business the IRA will be investing in – that would be a prohibited transaction. Although, an IRA holder can invest in an active trade or business that he or she is not actively involved in, however, that would trigger UBTI (tax at approx 35% on the business income).

The IRA does allow for the use of 401K Plan funds to purchase the stock of a corporation (“Qualifying employer securities”). The reason a Corporation and 401(k) Plan must be used and not an IRA is that there is an exemption to the prohibited transaction rules under Code Section 4975(d)(13) which allows a 401(k) Plan to purchase Qualifying Employer Securities (stock in a corporation – not an LLC interest) from an entity owned by a disqualified person. That is why one needs to establish a C corporation and a 401(k) plan and cannot use an IRA and/or an LLC.

Many people ask the question why an IRA cannot be used to buy or finance a business and why a corporation must be used to establish a 401(k) Plan and the reason is simply that using an IRA to buy a business that the IRA holder is actively involved in would be a prohibited transaction whereas Code Section 4975(d)(13) allows a 401(k) Plan to purchase stock in a C Corporation owned by a disqualified person.

With IRA Financial Group’s Business Acquisition Structure, a C Corporation will be formed that will establish a 401(k) qualified plan. The individual will then be able to rollover his or her IRA or 401(k) funds into the new 401(k) Plan tax-free. Note Roth IRA funds cannot be transferred into a 401(k) Plan, thus, only pre-tax retirement funds may be used. Once the retirement funds have been rolled into the new 401(k) Plan, the 401(k) Plan along with all other interested parties would purchase C Corporation stock. The value of the stock being purchased is required to be valued by an independent party (IRA Financial Group insists that this valuation is done and includes the cost as part of it’s establishment fee). Once the 401(k) Plan and all other interested parties have purchased stock in the C Corporation, the C Corporation will have the necessary funds to purchase the business assets or finance its operations.

Once the business has been funded, it is important that the company notifies it’s full-time employees, if applicable, that a 401(k) Plan has been adopted by the business. As a result, the employees would have the opportunity to participate in the plan and be entitled to all the benefits allowed pursuant to the Plan documents and applicable law.

Once your retirement funds have been invested in your new business, the tax attorneys at the IRA Financial Group will continue to work with you to ensure that the structure remains compliant with IRS and ERISA rules and procedures.

Each client of the IRA Financial Group is assigned an individual tax attorney who will customize a structure that satisfies his or her business and retirement needs while ensuring the structure is developed in full IRS & ERISA compliance!

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

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