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I'm retired, 60..... and I'm in the process of starting up a business that is franchised. I expect to be building a number of stores and plan to tap my IRAs to fund it, most likely in combination with bank financing for part of the hard assets (leasehold improvements, store fixtures, signs).

Questions: Is it feasible to have the IRA fund the business in such a fashion that I don't have to withdraw the money, pay taxes and invest the proceeds? It seems that it would be nice to defer the whole tax thing. :)

If feasible, is this desirable? Would I be introducing some long term complication?

******

I'm just considering my options. If necessary, I'll withdraw the money, pay taxes and start to rock 'n roll anyway.

Thanks!

Rob
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TMFBreakerRob: "I'm retired, 60..... and I'm in the process of starting up a business that is franchised. I expect to be building a number of stores and plan to tap my IRAs to fund it, most likely in combination with bank financing for part of the hard assets (leasehold improvements, store fixtures, signs).

Questions: Is it feasible to have the IRA fund the business in such a fashion that I don't have to withdraw the money, pay taxes and invest the proceeds? It seems that it would be nice to defer the whole tax thing. :)"


I am bout 99.5% certain that the answer to your question is no; see the rules about related party and self-dealing.
transactionshttp://www.irafinancialgroup.com/prohibitedtransactions.php.

I am 100% certain that someone will correct me if I am wrong.

Regards, JAFO
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Thanks, JAFO.

It doesn't hurt to consider alternatives..... and best to approach experts on the subject. I appreciate your insight.

I guess it'll be a combo of my IRAs and Wells Fargo. Nice that debt is cheap these days. I'll be careful to keep it small because I don't expect that situation to continue forever.

Rob
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I seem to recall that you can set up an LLC - Have the IRA invest in the LLC and the LLC can be controlled by you. I would contact someone locally well versed in this subject before trying anything.

Dusty
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I seem to recall that you can set up an LLC - Have the IRA invest in the LLC and the LLC can be controlled by you. I would contact someone locally well versed in this subject before trying anything.

Dusty

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That would be a prohibited act of self-dealing, as noted earlier.
There would be penalty tax of 15% of the amount involved, per year, until they catch you.

The technical provisions are Code Section 4975. The plain English synopsis is on pages 44-45 of Pub. 590.

Bill
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Bill:

I agree but I was sent a link that showed it was legal. I am trying to find the link and information. I will post back once I find it.

Dusty
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It can be done legally, but you have to be VERY careful. It's not a risk that I would want to take.

Ira
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I agree with IRA. Here is the link that I finally found:

http://www.bergmanlawgroup.com/clientalert1.php

Dusty
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I agree with IRA. Here is the link that I finally found:
http://www.bergmanlawgroup.com/clientalert1.php
Dusty

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I agree that's an interesting approach, and I hadn't heard of that ruling. But as Ira said, you have to be VERY careful.

And note that it only covers the particular transaction of the initial capital formation of the LLC, (and I would think a corporation would work as well,) where the IRA is the first investor to jump in. After all, before that, the LLC has no relationship to anyone, so you don't have a self-dealing transaction at that point.

But after that? I can think of a million pitfalls that could come into play, if you ever want to do another transaction of any sort with the IRA. Is the IRA going to be the sole owner forever? Is the IRA owner going to be involved in management, and get a salalry, or anything else in the way of compensation? You could have self-dealing taxes all over the place.

Bill
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Update:

My franchisor sent me to talk with a company called "FranFund".

Bottom line: There is a process to achieve what I'm looking for.... for a fee and it is known as a "Rollover for business start-up". FranFund performs the service of running through these steps:

Step 1: Get incorporated...must be a C-corp.

Step 2: Form a 401k sponsored by the C-Corp. Need a third party administrator, in this case...FranFund uses Merrill Lynch as the custodian.

Step 3: I would be a participant in the 401k and rollover money (for the business) from my another IRA account(s).

Step 4: The C-corp would issue stock and this stock would be purchased within the 401k.

* There are ongoing expenses with plan administration, including filing of Form 5500.

* Have to open the 401k to all eligible employees and they can either opt in or opt out. They can be offered the opportunity to invest in mutual funds. They do not get the opportunity to buy C-corp shares.... that would open a whole can of worms and wouldn't be feasible for this small business owner.

* Looking online, it appears that FranFund hasn't been having issues doing this. Here's a short Intuit discussion: http://community.intuit.com/posts/owner-purchased-stock-in-c...

* Article mentioning it: http://ezinearticles.com/?Franchise-Startup-Costs---How-Do-I...

* Another article: http://mobi.franchise-update.com/news/feature/503/ ...and there are other articles that lend credence to the idea that this is a proven approach that works if done exactly as the IRS requires.

Fee? $4695.... plus ongoing administrative fees of $95/mo

As one articles says, if you need $30k (for example).... just withdraw the money and pay the taxes. But, if you need a lot of money.... a crazy approach like this appears to be less painful than withdrawing hundreds of thousands of dollars and paying a mammoth tax bill.

Rob
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TMFBreakerRob: "Update:

My franchisor sent me to talk with a company called "FranFund".

Bottom line: There is a process to achieve what I'm looking for.... for a fee and it is known as a "Rollover for business start-up". FranFund performs the service of running through these steps:

Step 1: Get incorporated...must be a C-corp.

Step 2: Form a 401k sponsored by the C-Corp. Need a third party administrator, in this case...FranFund uses Merrill Lynch as the custodian.

Step 3: I would be a participant in the 401k and rollover money (for the business) from my another IRA account(s).

Step 4: The C-corp would issue stock and this stock would be purchased within the 401k."


From the last cited URL in your post:

Under this funding arrangement, business owners set up a C corporation for their new business. The C corporation establishes a new retirement plan. Then the individual's current retirement funds are rolled over into the C corporation's new plan. Last, the new retirement plan invests in the stock of the C corporation.

Not that I am an expert, but this process is still unclear to me.

First step in each instance is to form a C-corp. Who is the iniital sharehold when the C-corp is formed?

If the C-corp is to establish a 401-k, then it needs to be initially capitalized and officers appointed. Who is providing the initial capital and naming the original offices?

To rollover funds, you would need to be the employee of the new C-corp because only current employees can rollover funds.

If the C-corp is issuing more stock, then the initial shareholder is being diluted. In addition, if you are the initial shareholder and an officer of the company, it would appear to me that this is transaction with a related party, which would be a prohibited transaction as a result.

For this to work, there must be more going on or some other step(s) that is/re not fully disclosed.

I also note the old adage about having all one's eggs in the same basket.

Regards, JAFO
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