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How to use retirement dollars to fund your next venture

Kelly Rodriques, Contributing Writer

American Cities Business Journal logo

When it comes to raising capital, personal retirement funds are rarely an entrepreneur’s first idea.

A quick online search for “fundraising ideas for entrepreneurs” discovers information about everything from angel investors and charge cards to borrowing money from your family. There’s nothing about retirement funds.

Why is this? Individual retirement accounts (IRAs) were introduced in the 1970s, but many entrepreneurs don’t know that retirement funds can be invested in assets other than stocks, bonds and mutual funds. IRAs can own everything from private placements and limited partnerships to closely held stock and real estate. All it takes is working with a custodian that allows investors to self-direct their IRA investments into alternative assets.

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In fact, retirement assets held in private companies, direct real estate and other “hard” alternatives are growing at almost doublethe rate of the total IRA industry (12 percent vs. 21 percent).

Self-directed IRA owners may be ideal investors for your venture. Here are three reasons why:

1. They’re Long-Term Investors

Retirement investors tend to have inherently longer time horizons, which match the longer holding periods required of many private equity investments.

2. They’re Loyal Investors

Because investors can face penalties if they draw funds from their IRA before they turn 59½, many IRA owners choose to reinvest their earnings, which can provide you with a source of ongoing capital.

3. They’re An Additional Source of Funds

Clients who may have already invested capital with you using their taxable dollars can also do so with their retirement funds. This allows them to build wealth and generate income on a tax-deferred or tax-free basis.

A good first step is for entrepreneurs to seek the assistance of a reputable alternative asset custodian, CPA or tax attorney to determine if their investment is eligible to accept IRA funds. Certain IRS rules and regulations will apply to you and your investors, so it makes sense to work with professionals who can help you with the process.

In addition, the IRS wants to make sure that “you” and “your IRA” do not participate in any self-dealing. While it may be possible to invest in your own startup using your IRA funds, there are some important qualifications. If you use your IRA to invest in founder’s shares, you should work with an attorney who is an expert in this area.

Today there’s roughly $ 152 billion invested in alternative assets through self-directed IRA custodians. That number is sure to grow. The Pew Research Center estimates that 10,000 baby boomers will retire each day for the next 15 years. Those boomers will roll over their company-sponsored pension plans or 401(k)s into IRAs — where they can decide what they’d like to invest in. Entrepreneurs should take notice.

Instead of VCs, your next round of funding might come from IRAs.

To read this article on American Business Journals' website, click here.