American IRA Provides Options To The Unemployed Who Have 401(k)s Sitting Idle
American IRA, A National Provider Of Self-Directed IRAs, Provides Options To The Unemployed Who Have 401(k)s Sitting Idle. According to the most recent Bureau of Labor Statistics report, the unemployment rate stands at nearly 8.6%. Jim Hitt, CEO of American IRA, says “Many individuals have left their employers and, as a result, have left their 401(k)s sitting idle. I’m getting the word out that there are much more profitable options available.”
Jim Hitt, CEO of American IRA, continues “Many people have a 401(k) or other retirement account that’s out there and all but forgotten about. What they do not realize is that If they’re under 59½ years of age, and they have an old 401(k) balance in a dormant account, they have five choices:
- Cash out – and pay taxes and penalties if they haven’t reached the age of 55.
- Keep the money in place – and accept the fact that they may be stuck with some sub-par investment options, chosen for them by their old employer.
- Start drawing it down in substantially equal periodic payments, in accordance with Section 72(t) of the Internal Revenue Code.
- Roll the money over to an IRA – preferably by using a trustee to trustee transfer, which is the only sure way to avoid having to pay taxes and penalties on whatever they withdraw.
- Start a business or buy an existing business.”
That’s Right! – they can use their long-forgotten individual retirement arrangement to fund their own, closely-held small business.
Why would they do that? If they have a particular expertise that they can leverage into a business – and do so with a higher expected rate of return, and/or more safely than they can expect by participating in the stock and bond markets, it may make terrific sense to tap that forgotten account, and using it to start the business they always wanted to run.
How can they do this? By rolling the money over into a self-directed IRA. Technically, this is a variant of the rollover option listed above. But instead of sending their money to an investment company, they would retain a qualified administrator, who would help them set up their IRA in accordance with federal laws that govern self-directed IRAs.
From the perspective of the small business entrepreneur, the self-directed IRA has the following benefits:
- Income earned within the business is tax deferred. They can reinvest 100 percent of the business’s earnings back into the business or the IRA account, without having to give up a cut.
- No capital gains taxes to worry about. They can buy and sell assets –including stock and asset sales within the IRA – with no worries about either short-term or long-term capital gains, as long as the money stays in the account.
- If they use a Roth IRA account, their business will generate income tax free, with no capital gains worries.
If their 401(k) balance is reasonably small, it may be tempting to borrow money to leverage up, buy some inventory, obtain office space and generally handle the up-front aspects of starting or acquiring a new business. Be careful: Yes their IRA can borrow money. But it can’t borrow it from them. Nor from their spouse, nor from their ascendants and descendants and their spouses, nor from any of their administrators that help them with the account.
The IRA can borrow some start-up money from a third party, such as a bank or other suitably distant, disinterested lender. But any loans the IRA takes out must be non-recourse. The lender must have no claim on any assets outside of the IRA, and they cannot sign a personal guarantee on the loan. The account has to be self-contained.
Further, they can only contribute a certain amount in new money each year to the business in their IRA. So any liquidity needs have to come from retirement assets in the IRA, or assets that can be quickly and easily rolled over to the IRA. Other than that, they can only contribute a maximum of $5,000 in new money to any combination of Roth or traditional IRAs each year ($6,000 if they are over 50), and even these limits are subject to some income limitations.
Mr. Hitt cautions, “People must be careful what they take out. They also have to reinvest their profits back into their IRA. They cannot take money out of the IRA prior to reaching age 59½. Their IRA also cannot hire them, nor any prohibited individual, nor any entity they control, to provide goods and services. This also means the beneficiary of the IRA can’t draw a salary from the business within the IRA. The purpose of the IRA, according to the IRS, is to provide for their long-term retirement income needs, and self-dealing transactions with the IRA that are contrary to that interest risk “blowing up” the whole account. If that occurs, they could be liable for income taxes and penalties on the whole account – and not just the amount paid out improperly.
Having said that, if drawing a salary is desirable to you, please contact our office to learn about other products that may allow you to reach that goal.”
Despite the restrictions, American IRA finds that these arrangements can make excellent sense for some of their clients, who have the time, expertise and risk tolerance to establish businesses within their IRAs, and who do not rely on these businesses to provide basic living expenses until after they turn 59½.
About: American IRA, LLC was established in 2004 by James C. Hitt in Asheville, NC.
The mission of American IRA is to provide the highest level of customer service in the self directed retirement industry. Mr. Hitt and his team have grown the company to over $250 million in assets under administration by educating the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!
To learn more about American IRA, LLC and self-directed IRAs/self-directed Solo 401(k)s, please contact our office at 1-866-7500-IRA(472).