Who uses "Self-Directed" Retirement Accounts to fund start-ups?


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In the United States a retirement account like a 401K or an IRA can be incorporated as a "self-directed" account. A self-direct account provides you check-book control over your retirement account. It takes the money out of the funds that a current or former employer of yours chose and put it into a trust. You can then allocate the trust's funds on behalf of your retirement. Proceeds return back to the fund -- tax deferred.

While you can not invest your own retirement funds into your own start-up, it seems to me that this is a potential source of significant angle investment capital for many start-ups. Asking non-accredited friends, cousins, and pew-mates for money is hard. Having them have access to the cash is even harder. Having an "orphaned" IRA from 3 jobs ago which hasn't been rolled over and whose value is being nibbled away by financial advisors and brokers -- well, that may make it easier.

I am curious about the use of these accounts within the start-up community as a source of angel investment. Or as a source of first round investing.

Does any one know of an organization, financial advisors, or fund that is supporting start-up use of self-directed retirement dollars to launch their companies?

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asked Mar 22 '11 at 13:30
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Joseph Barisonzi
12,141 points
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3 Answers


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Self directed IRA can not be used to invest in anything you want. There are numerous limitations on their use. Only a good accountant can explain what you are actually allowed to do with one.

answered Mar 22 '11 at 14:11
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Gary E
12,510 points
  • You can invest in many things including real estate, venture funds, a friends or even a family members business. You can not invest in something you drive 1099 or W2 income from, something that directly benefits someone in your vertices family line (parents/kids), or investments that you derive direct benefit from (like horses or art). It doesn't really take a "good accountant" -- it is a pretty simple list. My client just worked with a brother and sister who bought each others mortgages with Self-directed retirement accounts; and a women who converted an orphaned IRA into a new bakery. – Joseph Barisonzi 8 years ago

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I spend today in the luxury of America’s flight travel industry. Let’s hear it for peanuts. On one leg of my flight I say next to a wonderful business executive from a health care company. He shared what he did. I shared what I did. We paused and let the flight attendant tell us the safety features of the plane.

After we got into the air and I had an opportunity to learn more about him I learned that despite his conservative presence he had just made a significant investment in a close life long friends start up business. He gave me the website, a brochure and told me everything he knew about it. It had nothing to do with the industry he was in. he was a powerful evangelist. I said he must know all of the risks of investing in a start up. His face got serious. “I know he said. But it is America, that is how we grow. And maybe we will get lucky and it will be a little extra for my retirement.”

I asked him if he used pre-tax retirement money to make the investment. “No” he said, that was the hard part he explained, they had to pull money out of their current savings. “Would it have been easier if you could had redirected some of your retirement savings to this venture?” I said. “Oh dear yes, we would have invested more” he said.

As we talked further and I explained that there was an option of a self-directed retirement account which would give him checkbook control over a portion of his

I expect tomorrow my client’s senior sales representative will be on the phone with him. Hopefully within 30 days we will be able to increase the percentage of ownership he has in his friend’s business.

I asked the question above because I wanted to know who else was doing this type of work. Instead I got three answers that didn’t answer the question, but told their opinions if why if should not be done. I appreciate those answers, thank you for taking the time to read and consider my question.

I appreciate their opinions. And I respectful disagree.

What is starving economic growth in this country is the frozen capital. Good job producing business are not getting the funding they deserve. The funding is dolled out in silly amounts to the same players with the same connections. (see color.com’s investment today) the venture capital firms systematically do a poor job of funding women, people of color, and those from rural or urban America.

Meanwhile millions of America’s have turned over our retirement to gucii shoe wearing BMW-driving Wall Street gamblers who get paid millions to move money in and out of financial “instruments” that no one -- even they-- can understand.

I cringe every time I open the statements they send me in the mail at how well my money has been managed over the last 15 years. I can do the math and see the time that it will take me to recover my retirement saving and allow me to realistically retire. And I know that simply putting sending money off to be gambles by the professionals is not going to do it. It is a matter of math.

Thank goodness there are alternatives.
Of course, I am not all that opinionated on the issue at all!

It is about balance. Balance of risk. Balance of reward. Going for our dreams. I believe that any person leading a capital raising campaign for a start-up, that is looking to raise the Friends and Family round, or even the Angel round of funding should make every reasonable tool available part of their toolbox.

They need to know about angel funding networks, and VC’s of course. They also need to know about grants and loans. they need to know about SBA. They need to know how to engage friends and family. One of the ways to do that -- is with self-direct retirement accounts.

I asked the question because I have a client who is successfully doing this. I would like to know of others -- so that they can network, improve the methodology together, build the capacity through collaboration and together become a strong resource for the economy building, job producing dream makers called start-ups!

answered Mar 25 '11 at 22:47
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Joseph Barisonzi
12,141 points

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While it can seem exciting for someone to invest in a start up, as we all know, there are many risks with every start up. I looked our investors in the eye and said "are you absolutely sure you understand that you could lose every nickel if you invest in our start up and things don't work out?"

In other words, I don't recommend taking money that you need for retirement and investing it in start ups. Use pre-tax money instead - better IRS treatment and much simpler.

answered Mar 22 '11 at 22:10
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Warren E. Hart
2,181 points

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