One of the less popular, yet msot useful options for your retirement plan is a self-directed individual retirement account. What this does is allows you to use retirement funds to invest in your business rather than in the stock market. Let’s look at some reasons why you might want to do that.
We know that most people’s retirement plans should include a Roth IRA, for the simple reason that distributions after retirement are completely tax free. Generally this is a pretty good deal – you can make a lot of money in the stock market, over time, and pay no taxes on it. However, what if you’re putting all of your effort into growing a business? Hopefully it’ll be growing much faster than the stock market as a whole, but it can be difficult to find sufficient start-up capital, and then you have to pay taxes on the earnings. If your money is in a self-directed IRA, you have a way around both problems: you can invest money from the IRA rather than taking out a loan from the bank; not only does this mean not having to get a banker to sign off on your business, but you don’t have to pay interest on the loan (although you do lose out on whatever your IRA would have been making if it was invested in stocks). Then, since the IRA owns a portion of the business, a percentage of your profit simply goes directly into the retirement account without you ever having to pay taxes on it and waits there until you retire!
Of course, the IRS does put a number of conditions on the use of self-directed IRAs to ensure that they aren’t being used merely to avoid taxes. Among other things, you generally have to appoint a self directed IRA custodian to oversee your account; this person may restrict what types of investments you can make using your account (although some will be hands off and mostly handle the records for you).