Business & Investment

Opinion: Want to use your IRA to start your own business?Think again, the new bill says

If you were thinking of starting a business with money from your personal retirement account, you might want to put that idea on hold for a while.

The same is true if you were thinking of using a tax deferred retirement account to invest in a startup run by a friend or family member.

NS Capitol Hill’s new tax bill We are planning to ban those movements. To make matters worse, it works effectively retroactively — so if you make such investments before they become law, you have two years to sell them or remove them from the IRA. ..

Sales can be costly. Removing them from your IRA will hit you with taxes.

The bill is currently under consideration by the Senate. It is expected to somehow become a law within a few weeks.

The current proposal does not allow IRA funds to be invested in companies that are executives or own more than 10% of the shares. Therefore, it is very difficult to invest in your own business. Started by friends and family.

(The new law also prohibits so-called “accredited investors” from using IRA funds for private placements and investments in higher-risk ventures, thus using third-party “angel” investors through private placements. You will not be able to do that either.)

These investments were previously possible as long as you were running a so-called “self-managed IRA” where you could invest your retirement savings in assets other than stocks, bonds and investment trusts.

New suggestions come after that revelation early this summer PayPal Billionaire Peter Thiel Thanks to some controversial tax measures and great luck, we have been able to accumulate $ 5 billion in IRA in almost 25 years.

With Steve Rosenthal, a tax expert at the Liberal Urban Institute One of the main supporters of change, Explain the rationale for the new proposal. “Too much tax spending [i.e. tax breaks] Go to the wealthiest and whitest family, [and] Reward those who aren’t rewarding, “he says.

But the law doesn’t just crack down on the ultra-rich, says Adam Bergman, CEO of a voluntary IRA provider. IRA Financial..

“I talked to someone early today,” he tells me. “He lives in Connecticut and does a good job. His IRA has something for $ 100,000 and his friend is the CEO of California and becomes a small business with 45 employees. So he called me, and he says Adam, I read this bill. Should I do it? Make this investment today and this bill is If passed, there is now a two-year grace period to get rid of this investment. “

Bergman said the Mega IRA was already limited by another provision of the same tax bill, which would bring the tax deferred retirement account cap to $ 10 million. (((Few people in the United States have an IRA balance of more than $ 25 million... “99% of our clients are less than $ 1 million,” Bergman said. According to him, the average balance is $ 125,000. )

Marcia Wagner, a tax expert at the Wagner Law Group in Boston, finds the proposal surprising. “It’s not entirely clear why this particular provision is included in the House Ways and Means Committee markup,” she says. “There are many provisions for very wealthy individuals who have a very large amount of money in an IRA, but this proposal affects individuals in different categories, perhaps the upper middle class,” she said. He adds: “The category of individuals eligible as accredited investors is not the category of ultra-high net worth individuals.”

(Legal “accredited investors” must earn $ 200,000 a year as an individual, $ 300,000 as a couple, have $ 1 million in assets, or be qualified as a financial expert.)

It’s too early to know if these provisions will eventually become law.

On the other hand, for ordinary Joe and Joanna who want to start their own business, these provisions may have a silver backing, as they currently stand.

If you use your IRA to fund your business, and your business fails, you will lose money.

But if you instead use your credit card or bank debt to fund your business, IRA money is safe even if your business fails. This is because IRA and 401 (k) are protected from creditors under federal law in the event of bankruptcy.

Opinion: Want to use your IRA to start your own business?Think again, the new bill says Opinion: Want to use your IRA to start your own business?Think again, the new bill says

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