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Considering using IRA funds as a source of business start-up capital


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With very limited exceptions, an Individual retirement account owner is free to choose from the whole world of investment opportunities, which has led many IRA owners and their advisers to conclude that it is permissible for IRA owners to use their IRA to make an equity investment in a business in which they will be involved. However, when using IRA funds to invest in a business, an IRA owner needs to be aware of the prohibited transaction rules, which prohibit certain transactions between a plan and disqualified persons with respect to the plan. The recent Tax Court decision in Ellis demonstrates how a taxpayer can easily run afoul of these rules.

In his article Ellis, the Case of a Misdirected IRA, originally published in The Tax Adviser, Bill O'Malley concludes that using an IRA is not a suitable way to establish a business for which the IRA's owner intends to provide services and highlights a potential alternative approach.


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