You Can Buy a Business with Your IRA – What You Need to Know

Yes, you can use retirement funds to buy a business. The right structure depends entirely on whether you plan to be a passive investor or to work in the company. David Moore of IRA Advantage (Equity Advantage’s sister company) explains the main options on a recent 1031 Exchange Bros podcast: Self-Directed IRA, Checkbook IRA LLC, or Rollover Business Startup (ROBS), and what risks to watch out for.

This guide breaks down the choices, highlights prohibited transactions, and gives you a practical roadmap for informed conversations with your advisor.

Step One: Passive Investor or Active Role?

The first and most important decision is whether you will simply own the business as an investment or if you plan to actively work in it.

• Passive investor: You can use a Self-Directed IRA or a Checkbook IRA LLC to hold ownership in the business.
• Active owner or operator: If you want to work in the company, you will need a ROBS setup with a 401(k) plan and C-corporation. You cannot use an IRA LLC if you intend to be employed by the business.

David Moore puts it this way: “If you are going to work in the business, do not use an IRA LLC. Consider rolling into a 401(k) and C-corporation instead.”

Option 1: Self-Directed IRA (Custodian Model)

With a Self-Directed IRA, the custodian remains the legal owner of the asset. You instruct the custodian to direct funds from the IRA to buy into the business.

• Best for: Investors who do not need daily control.
• Downside: Transfers and approvals can take time, which may complicate time-sensitive business purchases.

Option 2: Checkbook IRA LLC (The Checkbook Advantage)

A Checkbook IRA LLC puts a specially structured LLC between your IRA custodian and the business.

• The IRA is the economic owner.
• You serve as manager of the LLC, giving you signing authority for investments.
• This speeds up deals since you do not need custodian approval for every action.

Limitations: Even though you manage the LLC, you cannot personally work in the business. Doing so creates a prohibited transaction that could disqualify your account.

Combining Retirement Accounts and Avoiding Disqualified Parties

You can pool funds from different accounts (Traditional, Roth, SEP, even some inherited IRAs) into a single investment, but the rules are strict.

David Moore emphasizes two key questions:

1. What type of retirement accounts are involved and what is the source of funds?
2. Who are you buying from or transacting with?

Disqualified parties include your parents, children, grandchildren, their spouses, and any entities they control. Transactions with these parties are prohibited and carry severe penalties.

What You Can and Cannot Buy

Retirement accounts can invest in a wide range of assets:

• Real estate, LLCs, partnerships, private equity, promissory notes, and more.
• But not collectibles (art, rugs, antiques, certain metals), life insurance contracts, or stock in an S-corporation held by an IRA.

Always check eligibility with your custodian before moving forward.

Prohibited Transactions: The Biggest Risk

A prohibited transaction can cause the IRS to treat your entire IRA as distributed, triggering taxes and penalties.

Examples include:

• Working in a business owned by your IRA.
• Using IRA-owned property personally.
• Buying from or selling to disqualified relatives.

This is why choosing the right structure at the start is critical.

Option 3: Rollover Business Startup (ROBS)

If you plan to work in the business, a ROBS setup is often the right path. Here is how it works:

1. Form a new C-corporation.
2. Create a 401(k) plan sponsored by that corporation.
3. Roll eligible retirement funds into the new 401(k).
4. The plan buys stock in the C-corporation.
5. The C-corporation uses the funds to buy or start the business.

Key points:

• Not all accounts can roll into a 401(k). Inherited and many Roth IRAs are excluded.
• The plan must meet IRS and ERISA requirements, including administration and reporting.
• IRA Advantage often requires the client to hold a small ownership stake directly in the C-corporation.

Practical Checklist Before You Move Forward

Ask these questions before committing:

• What is the purchase price and timing of the deal?
• Which accounts hold the funds?
• Will you be a passive investor or work in the business?
• Are any parties involved disqualified?
• Does the purchase agreement account for custodian or retirement plan processes?
• Have you consulted tax and legal professionals?

Common Scenarios and Best Structures

• Passive, single IRA, no rush → Self-Directed IRA.
• Passive, want control and speed → Checkbook IRA LLC.
• Active owner or operator → ROBS with 401(k) and C-corporation.

Final Takeaway

Both Self-Directed IRAs and 401(k)-based ROBS arrangements let you use retirement funds to buy a business, but your role matters most.

David Moore sums it up: “If you want to be employed by the business, use a rollover into a 401(k) and C-corporation. If you only want to invest passively, an IRA structure works fine.”

Before signing a purchase agreement, define your goals, gather account details, and get advice from a specialist. IRA Advantage recommends discussing your objectives early to avoid costly mistakes.

The Guys With All The Answers…

David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.