Get Your Business Funded: Creative Methods for Getting the Money You Need

Using Your Individual Retirement Account (IRA)

Take the money and run. Maybe you are thinking that there is only one way to use your IRA for your business: namely, withdraw the funds, take the penalty, and pay the tax due. Fortunately, that is not the only way, and not even close to the best way, but since it is a well-known way, let's examine it first.

(Caveat: There are all sorts of different IRAs and they have different rules—traditional IRAs, SEP IRAs, Roth IRAs, and so on. Before doing anything, check with your own financial adviser to see what rules apply to your account. In this section, we are talking generally about IRAs.)

The analysis you need to engage in is this: What is the likelihood that you will generate more money with your new business than with your old IRA, and is it worth taking the chance that you may lose your retirement account altogether?

Example: Let's say that you decide to withdraw $100,000 from your IRA and you are not yet 59½ years old so you will have to pay the penalty. Let's further assume that you earn 5 percent on this account—$5,000 yearly. By taking the money out of the account early, you will pay $10,000 in penalties, and, depending upon your tax bracket, maybe something like $30,000 in taxes. You will therefore have but $60,000 left to invest in your business. The question then is, how much can you expect to earn from this business? If your idea is the winner you believe it to be, it is a lot more than the $5,000 you were earning yearly in ...