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I received this phone call from a client of mine about using Roth IRA funds to do some flips, and at the same time, she asked, how do I finance my business when all this money goes into my Roth?
Here are some great answers, which work for her, and her husband’s Real Estate Company:
She and her husband both have a SEP-IRA and have made contributions and profits in excess of $500,000. A couple of years ago they asked about Roth IRAs. I told them that if they qualify, they could convert these contributions made to their IRA as SEP contributions to Roth IRAs. The regular, or traditional IRA would remain in tact so that they could make their usual SEP contributions every year, without administrative hassles. (This also works for SIMPLE IRAs, and in-service withdrawal rollover’s to IRAs).
Having paid the taxes, the clients have a basis in excess of $500,000 in their Roth IRAs. (The basis is the amount they have in the Roth after tax. The clients paid the taxes using money not in their plan. They could have used IRA funds to pay the tax also)
They have two deals working which means using about $100,000 to buy two single family houses in Florida. They have sold these houses, net of closing costs, for a total of $150,000. They also have a couple of other deals in the works during the next few weeks with similar results anticipated.
In the mean time, they need to run their business. With all the money in the Roth, they can take out the basis up to the amount they have, or in this case $500,000, and live on it, put some into their business, whatever they want, as they have no tax implication on those funds. I suggested that one approach they should consider is to take the amount they currently need to run their business and personal expenses, from their basis, and then roll that amount back in within 60 days, thus protecting that amount of their Roth. At the same time they can also use part of their basis to make deals and get current income.
They need $50,000 for the next two months to live on. They withdraw $50,000 from their Roth Basis money and use it for that purpose. At the same time they want to make some deals to show income outside their Roth. They take an additional $100,000 of their basis and make a net $50,000 in the next few weeks. That shows on their income statement. As they only needed $50,000 to live on, they can roll back that $50,000 profit they don’t need. They still have $100,000 to work with. From then on it is a matter of budgeting. If they make more deals like the ones they have a track record with, they could make enough to live on and repatriate more of the basis they withdrew from their Roth (as long as they do it within 60 days of the withdrawal date). They could always just keep the money making money outside their Roth.
At the same time they are going to make deals with the Roth money. There the profit stays in the Roth, remembering all the while that the basis remains forever. In this case, the basis is still at $400,000, which can be withdrawn at any time. Of course when these clients reach 59½ years old, in 20 years, they can withdraw any amount of money, the basis and the profit, at any time.
In addition they can continue to make contributions based on earned income. These clients are savvy enough to make sure that at various times their earned income and contribution levels need to drop to remain consistent with Roth conversion rules.
Another way they can accomplish some of their longer term business and tax free goals is to leverage some of the deals they are making in their Roth. Remembering that leveraged deals in any type of IRA are subject to Unrelated Business Income Tax, they will be out of a leveraged situation for a year prior to sale, if the profit is more than $1,000. They will repay the debt from other cash funds in their IRAs.
This is just a primer on how you can use your Roth to help run your business and make income tax free as well as regular income from deals. There are many more options available, just as creative as these. Such options include carry-back notes and using other peoples money including their IRAs and Keoghs for doing deals. It is all interesting and exciting when you know the rules and how to use them to your advantage.