I posted this at the Fairmark forum, but didn’t get much of a response, so thought I might try here

Just for grins I’ve been reading through the web site from Guidant ( [www.guidantfinancial.com] ) on using IRA assets to fund one’s business. If I understand it correctly, here’s how it works:

1. Business is established as a C-Corp or LLC with corporate option (no pass through entities)
2. Business owner is an active participant in business operations (defined as working >1,000 hrs per year)
3. 401(k) (or other Qualified) retirement plan is established for the business with minimum annual contributions from employer/owner (not sure why this is a requirement)
4. Owner’s TIRA is transferred to plan (pretax portion only)
5. Owner sells shares of company to plan, thus pulling the IRA $$ out for business operations

Is my interpretation correct?

If so, this would then seem to be a method of providing capital financing to the business only. If the owner is planning a business such as, say, an Oil Can Henry Franchise, and will incur costs of incorporating anyway, then might this not be one way to consider in providing financing to the new franchise, assuming, of course, that the IRA is not needed for retirement income?

If so, then the concerns I’d have for using this kind of financing approach are:

a. Cost of setting up and annual administration of the plan over a simpler plan for myself and employees like a SEP or SIMPLE IRA
b. Illiquidity
c. Potentially being limited to the plan administrator’s (like Guidant) investment platform for investments other than company stock
d. RMD’s at 70.5. The owner would be >5% shareholder, so no deferral
e. Inheritance for other than a spouse, and the subsequent minimum required distributions
f. IRS audit to ensure $$ from selling stock to 401(k) are used for business capital costs??

Any thoughts or comments on this use of an IRA?

BruceM