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How SDIRA Investing Can Make You an Entrepreneur

Learn about the possibilities of investing in private businesses with a SDIRA.

Posted on April 12, 2022

Many people often dream of breaking out of the traditional 9 to 5 world and becoming an entrepreneur. The thought of being your own boss and working on your own terms is enticing, but trying to figure out how to do it can be overwhelming. Not only do you have to have an idea, a business plan, and a goal, you need the capital to get started.
Did you know there are $28 trillion dollars sitting in retirement accounts? Yes, trillion with a T! Those savings funds could be the answer for many hopeful entrepreneurs. Self-directed IRA money can be used for private loans, or those funds could be used to invest in your start-up or venture.

What is a Self-Directed IRA?

A self-directed IRA is an individual retirement account that provides investors with increased control over their investments. While it's legally no different than any other IRA, it allows the account holder to make alternative investments, including real estate, private equity, and promissory notes, rather than just the traditional investments associated with IRAs like stocks, bonds, and mutual funds. This type of IRA is popular among investors who want to diversify their retirement portfolio and have a more hands-on approach to their investments.

How Can I Use SDIRA Money to Fund My New Business?

Studies show that one million self-directed retirement accounts are investing into private companies. With trillions of dollars sitting in retirement savings available to be invested into private assets, it's possible to fund your business with IRA funds… but how? The first thing you must understand is how a self-directed IRA is involved.
Since a self-directed IRA allows the account holder to diversify their investing into a wide range of alternative assets, they can invest directly into real estate, or if they prefer to take a more passive approach, they can lend their money to startup businesses that need funding or invest in shares of small companies. These private businesses include limited partnerships, joint ventures, and limited liability companies. Since self-directed IRAs offer great benefits like tax advantages and the ability to invest in familiar assets, these plans are becoming more and more popular with private investors that want investment options with more control and freedom.
Once you have found a self-directed IRA account holder who wants to invest with you, the process is pretty simple. You will decide the details and terms of the investment together, then provide the IRA custodian with those details. At Quest, we require an internal form with information like funding amount, maturity date, who is taking the money, etc., along with a few supporting documents depending on what type of asset is being purchased. Once the custodian has all the details, they can send funds directly to you on behalf of the investor's IRA. It's that simple! Whenever you need to make payments or payouts, you pay back their IRA.

Where Do I Find SDIRA Money to Fund My Business?

As an entrepreneur, the process to use self-directed IRA funds is simple, but requires a little bit of work and networking. Since self-directed IRA custodians like Quest must remain very neutral, the custodian can never put the investor and the new business owner together. This is where it's up to you to make connections and share that this possibility is out there. Many people don't know they can use self-directed IRAs to fund private investments and new companies, so with a little education, they can become interested investors.
It's important to be familiar with the basics of how self-directed IRAs work and how someone can use the account to invest with you. Understanding the general process will help you as you share the possibilities during networking.
One way to find potential self-directed IRA account holders is to visit events held by self-directed IRA custodians. It may seem obvious, but the most common place to find SDIRA funds is at an SDIRA event! At Quest, we host around 3 local events every week, providing many opportunities to find potential investors. There are always certified IRA specialist available at the events to help answer questions or be a resource for you.

What Else Should I Be Aware of?

When using self-directed IRAs to become an entrepreneur, it's important to remember that there are certain accounts you cannot do business with, including your own! Self-Directed IRA rules say that you can't use your own IRA to fund a startup company that you own personally. It must be someone other than a close relative, which is why it's crucial to network at local and online investing events.
Another thing to be aware of is Unrelated Business Income Tax (UBIT). While you generally don't pay tax on investment income in your IRA as it grows, such as rental income, capital gains, or interest income, if it receives business income, then this certain type of tax may come into play. This sometimes happens when a self-directed IRA is invested into a business that doesn't pay corporate income tax. Investors may want to avoid this costly tax, so it's important to speak with a tax advisor to make sure your business is structured correctly to make it more appealing to investors.

Is Entrepreneurship in Your Future?

If you have a business plan and know how to find funding, you're already halfway there to making your dream a reality. Now that you know the power of using retirement savings from a self-directed IRA to fund your business, it's time to get out there and network. And when it comes to networking, it's important to stay active and take the opportunities to network with investors as often as possible.
It's helpful to have the contact information for a Quest Trust IRA Specialist easily accessible in case you are talking to those who may want more information than you can provide. If you ever have questions, you can always contact an IRA Specialist by scheduling a direct 1-on-1 consultation. You never know which conversation might lead to something life changing for you and your business venture, so get out there and network!

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