Raising Capital for Start-Up Ventures Using Self-Directed IRAs

Raising Capital for Start-Up Ventures Using Self-Directed IRAs

Are you on the search for funds for your ventures, but having no luck? Then search no more! Anyone with an IRA can invest in start-up ventures. According to the Investment Company Institute there is currently over $8.2 trillion in individual retirement accounts (IRAs). Now imagine if those retirement accounts were Roth IRAs. That money could all be taken out tax-free without any penalties after age 59 ½.

With a Roth IRA you pay taxes on the money you contribute, so after age 59 ½, and after having the account open for at least 5 years, you can take all of the funds you’ve accumulated with it’s gains out of the account tax-free. For example, if I contribute $10,000 to a Roth IRA, I would pay taxes on that amount. But then I use that $10,000 to invest in a start-up venture and my $10,000 turns into $50,000 which is deposited right back into my Roth. I can later take that $50,000 out of my account without ever paying taxes on it.

Sounds too good to be true, right? Matt Levchin, chairman of Yelp, used his Roth IRA to invest in the popular review site, then in 2010 he sold 3.1 million of his shares inside of his Roth and gained a profit of nearly $10.1 million dollars. Since he invested using his Roth IRA he can later take that money out with all of its gains, tax-free. According to the Securities & Exchange Commission, filings show Levchin still has 3.9 million shares of Yelp, which is trading near $22 a share inside his Roth IRA. So it appears his tax-free retirement vehicle is worth at least $95 million.

Peter Thiel, billionaire co-founder of PayPal, was an early investor in Facebook. Thiel used his Roth IRA to partially invest in Facebook which is now valued at more than $500 billion. If Thiel invested just $10,000 using his Roth IRA when Facebook was a start-up company, his retirement account could be valued at more than $25 million. Since there is no cap on how much money can be in a Roth IRA, after age 59 ½ , Thiel can take that $25 million tax-free.

Mitt Romney is another investor with a large Roth IRA. Romney’s IRA is reportedly valued at more than $100 million. How does one get such a large retirement account? Gains from his private equity investments are tax-free using a Roth IRA.

What makes a self-directed IRA different from a regular IRA are the investment options permissible. Self-directed IRAs can invest in real estate, private equity, futures and forex, and more, whereas normal IRAs limit your investment options to stocks, bonds, and mutual funds.

Steps to Open a Self-Directed IRA:

Step 1: Instruct your investor to open an account with Midland Trust..

Step 2: Have your investor fund their self-directed IRA. If they are moving their money over from an old 401(k) or other employee benefit plan, they will need to do a rollover. If the money is coming from a current IRA (such as one invested in the stock market), they will need to do an IRA transfer. They can also fund their account by making a personal cash contribution (there are IRA contribution limits).

Step 3: Have your investor direct Midland to invest their self-directed IRA funds into your start-up venture.

It’s that simple! Tap into the $8.2 trillion in retirement accounts that is typically overlooked when searching for investors! You and/or your investor can also call Midland at (239) 333-1032 any time to discuss more details about self-directed IRAs or how to open a Roth self-directed IRA to gain the maximum tax benefits. Now the next time you get the dreaded “I would love to invest, but I don’t have the funds” you can tell your potential investor where to find those funds.