An individual retirement account allows you to save and invest for your later years. A self-directed IRA gives you wide latitude in your investments. The only two investments explicitly off-limits are life insurance policies and collectibles, although certain precious metals are acceptable. IRA rules prohibit self-dealing.
IRA rules prohibit any transactions in which you use your IRA to buy items for personal use. This extends to the business you run, including a property-flipping one. You are not permitted to use the assets of an IRA to benefit yourself or your family prior to retirement. The rule also applies to fiduciaries, which are individuals that have discretionary authority over your IRA, such as a trustee. If you buy property for your own use with IRA money, the Internal Revenue Service will dissolve the account and you’ll owe taxes on the account balance as it stood on Jan 1 of the year in which you performed the prohibited transaction.
Unrelated Business Taxable Income
Your IRA normally cannot own a profit-producing business without creating unrelated business taxable income, which the government taxes. The purpose of this tax is to prevent entrepreneurs from using their IRAs to give them an unfair tax advantage over their competitors. For example, if your IRA owns a cattle breeding operation, you wouldn’t have to pay income tax on the profits until you withdrew them from your IRA. The UBTI tax removes this incentive. The UBTI tax also applies to income-producing property financed with debt.
Despite the restrictions described, your IRA can own rental property without creating UBTI. This requires that the IRA trustee be responsible for paying all the bills, directly or indirectly managing the property and collecting all the income on the IRA’s behalf. You cannot use non-IRA money or your own labor to assist a rental property owned by your IRA without incurring UBTI. You cannot live in the rental property owned by your IRA. The same restriction applies to your relatives..
You might be able to use your IRA to help finance your business. If you set your business up as a C corporation, you may be able to have your IRA buy shares from the corporation through a private placement. This can be risky if not performed properly and the only good way to eliminate the risk is to request pre-approval from the IRS. You will have to pay a fee for a private ruling from the IRS and you’ll probably also incur legal fees preparing the request. Another way you might use your IRA money for your business is to roll over the IRA to the corporation’s retirement plan and invest this money in the corporation’s stock. However, this technique might be a gray area, so check with a lawyer or CPA before proceeding.