Funding Your Business with Your IRA is Legal yet Under IRS Scrutiny

Photo Credit:Flickr/401(K) 2012
Photo Credit:Flickr/401(K) 2012

It is common knowledge that starting a business requires start-up funds and that sufficient funding is one of the things that holds most people back. While many people are unaware of the ability to use a Self-directed IRA or 401(k) to start a business it is a legal option.

According to a recent Forbes article, the IRS is now beginning to take a closer look at those entities that have taken advantage of this feature. Known as the Rollover Business Startup (ROBS), it allows entrepreneurs and small business owners to use a Self-Directed IRA, a 401(k) loan feature.

The article states, “The ROBS structure is really the only legal way one can use retirement funds to buy or finance a business that you or another “disqualified person” will be involved in personally. Although the Internal Revenue Service (IRS) has held the structure legal, it is not without controversy and potential IRS audit risk.”

If you’ve used your IRA or 401(k) to start your business, you may want to pay attention this upcoming tax season and/or ask your tax preparer to fill you in on the details of the transaction that have attracted the attention of the IRS.

According to the Forbes article, “The ROBS structure started to gain popularity in the early 2000s and now, some believe that over fifty thousand of these structures have been established to date. The popularity of the ROBS solution caught the eye of the Internal Revenue Service (IRS) around 2005. The IRS was concerned that there was a high level of abuse involving the establishment and maintenance of the ROBS solution. As a result, on October 1, 2008, the Tax Exempt and Government Entities Division of the IRS issued the only real administrative guidance on rollovers of retirement plan assets to fund business start-ups – ROBS (the “ROBS Memorandum”).

If you’re not sure if the business started with your Self-Directed IRA is compliant, call IRSAllstars. We’ve been helping individuals and small businesses navigate through IRS for more than a decade.