Beware the "Too Good to Be True" shortcut - IRS Warns Against Funding a Business Start-Up with Retirement Money
Unemployment is up, business loans are down and retirement funds are shrinking, leading many Americans to search for a solution. One option is commonly promoted as a way to "fund your business with your retirement plan". Is this the solution? As if to answer that, the IRS recently released a memo titled, "When 'Too Good to Be True' Very Well May Be: Funding Business Startups with Plan Assets."
Boulder, CO (PRWEB) November 26, 2008 -- Unemployment is up, business loans are down and retirement funds are shrinking, leading many Americans to search for a solution. One option is commonly promoted as a way to "fund your business with your retirement plan". Is this the solution? As if to answer that, the IRS recently released a memo titled, "When 'Too Good to Be True' Very Well May Be: Funding Business Startups with Plan Assets."
Financial companies that promote this arrangement, the "Rollovers as Business Startups", or ROBS arrangement, claim that the IRS has pre-approved the arrangement for years. However, the IRS reports that ROBS will be scrutinized very carefully, "may violate the law," and "may be prohibited transactions." If the arrangement is a prohibited transaction, the retirement account in question could be closed and the funds subject to excise taxes. The IRS warns that they will focus on any transaction that claims you can transfer money without paying taxes.
The IRS reports that they have seen an increase in transactions that try to "exploit the generous tax benefits enjoyed by qualified retirement plans." Rules associated with the IRS are rarely described as "generous" or "simple", but in this case, those descriptions are generally correct.
The IRS requires a custodian between the retirement plan holder and the retirement funds. You can't spend the retirement money on yourself, your family, or your business, until you retire. Simple.
Play by the IRS rules, and most retirement plan contributions and investment profits are tax-free or tax-deferred. Generous.
Playing by the IRS rules, in this case, is easier than it sounds. With an approved custodian between you and your retirement funds, you can choose how to invest the money - as long as the investment is not in yourself or your company. Be careful of any company that offers to get around these rules. Like the ROBS arrangement scrutiny, similar focus is expected soon on the highly promoted "checkbook control" scheme for assets within an IRA.
Many options remain for the retirement investor who wants to avoid the ROBS trap yet escape the stock market roller coaster. Catherine Wynne, president of Entrust New Direction IRA, Inc., which provides custodial services on self-directed IRAs, said, "Our clients have invested in everything from condos to motels, in addition to foreign stocks and gold bullion." Entrust New Direction IRA, Inc is offering a new service, the IRA Card which provides quick access to IRA funds but keeps the custodial layer between the IRA holder and the IRS. The IRA Card can be used like an ATM or a credit card for qualified retirement plans, providing easy access without compromising the tax-free or tax-deferred status.
Entrust New Direction IRA, Inc offers self-directed IRAs, 401(k)s, Health Savings Accounts, and a variety of other qualified plans and can be reached at newdirectionira.com or 877-742-1270.
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