Fund an REI business with ira

[Jonathan Winkler]

Hello BP forum,

I came across an article this week that suggested funding a new business with an IRA and that could be used for investment properties. It seemed a bit unconventional and I haven't seen that suggested in any REI books.

Thoughts on this?  Is it legitimate or does it come with exorbitant costs?

[Brian Eastman]

@Jonathan Winkler

There are two ways you can put retirement money in an IRA or 401(k) to work in real estate.

With a self-directed IRA, the IRA can invest in real estate instead of being limited to conventional stocks & funds. This is a way to diversify your tax sheltered savings, and not what I would call funding a business. All expenses are paid by the IRA and all income accrues back to the IRA tax free. You are limited to being an investment manager, and cannot personally benefit by using the property or drawing income. This tool is good for passive investments like rentals, syndications, notes, private real estate funds, etc.

With a Rollover as Business Startup (ROBS) plan, you can use existing retirement funds to capitalize a business that you operate.  You can be hands on and draw a salary. There are not taxes or penalties, but the business itself will be taxed.  This does not work for passive investments like rentals, and must be applied in an active business like real estate construction, flipping, or a services business like a resort, hotel, adult care facility, etc.