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If you’re looking to start or purchase a business, you may be considering using your retirement account as a funding option.
There are different ways to tap a retirement account for business capital, each with its own benefits and drawbacks. Two of the more well-known options are:
- Rollovers as a Business Startup (ROBS): Rolling over a retirement account, forming and investing in a C-Corporation, purchasing stock from the corporation, and using the funds to pay for business costs
- Self-directed IRA: Investing in a business – directly or through a Limited Liability Corporation (LLC) – using a retirement account held by a self-directed account custodian
If you’re considering these business funding methods, which one is best for you? Should you set up a ROBS, or would it make sense for you to open a self-directed account for business capital?
The chart below outlines the difference between funding a business with a ROBS vs. funding with a self-directed IRA, how each strategy works, and the pros and cons of each. Before you decide, it’s important to work with the appropriate tax and/or legal professional and understand the potential tax implications.