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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10133
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My Name ***** ***** little and its complicated Because of

Customer Question

Customer: My Name ***** ***** little and its complicated Because of the down turn in the Oil Business I am close to losing my job I have just over 45,000 in my IRA can I pull this money to invest in a Business? without penalty or with penalty
JA: Thanks. Can you give me any more details about your issue?
Customer: that's my issues loosing job bills and credit to worry about
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Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I can help here. I am a CFP, hold a Law Degree, an MBA in Finance, and most important here, hold the CRPS (Chartered Retirement Plans Specialist) designation.

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Normally when you pull money out of an IRA, the money that you pull is added to your taxable income for the (because the dollars all went in pre-tax and have never been taxed) ... and also, because congress set these dollars up to provide for retirement, there is an additional 10% penalty tax if you pull the dollars out before age 59 and 1/2.

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However, there is one possibility (although IRS frowns on it, and you really have to dot your i's and cross your t's - do it right) for having the IRA, itself, invest IN the business (meaning that, because the IRA invests in the business, rather than your pulling the money OUT to invest it somewhere else - which, again, causes the taxes and penalty taxes - it's not a distribution).

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You can read the full WSJ article here: http://guides.wsj.com/small-business/funding/how-to-tap-an-ira-or-401k-to-help-fund-a-start-up/

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Bot***** *****ne, if you do this with one of the IRA custodians that have experience in the area, and you follow their instruction well about the steps in doing it AND do things the right way AFTER setting it up (so as to avoid what IRS calls prohibited transactions) it IS possible.

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Some of the steps are ... set up a C corporation and establish a corporate retirement account, then roll outside retirement accounts into the corporate plan, and invest the money in the company’s stock, Since you're buying shares of your own business, you're essentially funding the company.

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The Internal Revenue Service says such moves raise legal and procedural issues. While the IRS has issued determination letters validating many of these plans, it is continuing to study the issue. There’s no IRS ruling authorizing the full process.

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Advisers are likely to charge several thousand dollars to help set up a plan and levy hefty annual fees. So this strategy makes financial sense only if a person is investing a big chunk of their retirement money in a business.

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And I'll add one thing ... In my experience... and I've been in this profession over over 30 years ... IRA's that diversify well, stay in for the long term and ride out the choppy years like we're having now to get those double digit returns that come every few years do much better than the average "self-directed" IRA such as this.

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BUT, again, f your business idea is a good one, this can be one way to make it happen.

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Let me know if you have questions.

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Lane

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Expert:  Lane replied 1 year ago.

I hope this has helped.

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If you have additional questions about the "do's" and "don't's, let me know and I can help

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Lane

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