Summertime. ‘Tis the season for dreaming: dreaming about long lazy days, sleeping in till noon, sitting in a rocking chair on a porch overlooking gently flowing waters. ‘Tis the season for booking a weekend at a bed and breakfast, reveling in the charm and hospitality of the place, and wondering if someday you, too, could own and operate such a cozy sanctuary in your own piece of Eden.
While your bank account may be sneering “dream on,” there is one potentially generous asset that’s begging you to take advantage of its largesse: your IRA account.
When structured properly, the purchase of a B and B (or any other business or franchise) can be made with IRA funds before retirement age and without incurring early distribution penalties. Since the majority of people who choose to own B&Bs are middle-aged, their retirement accounts have accumulated some pretty decent money over the years. That money can be used now to buy a B and B; and by doing so, you can secure your dream today while paving the way for an even healthier retirement.
By using a specialized structure built around a “self-directed IRA,” or real estate IRA, your purchase of a B&B is viewed by the IRS and Department of Labor (DOL) as an investment made on behalf of your retirement account. Under this structure, you are required to pay yourself a salary, work at least 1000 hours yearly on the business, and reinvest profits back into the business or into your retirement account. When funneled back into your retirement account, your profits enjoy the same deferred tax benefits as the rest of your IRA. It’s a great way to grow your retirement money.
And if you don’t have enough IRA money yourself to buy the business outright, you can partner with others, as long as they, too, put in 20 hours per week on the project and meet other DOL requirements. Many husband and wife teams have discovered this to be a perfect business arrangement.
You also have the option of using personal loan money in conjunction with your IRA funds, such as a home equity loan, SBA or other leverage. The ideal, of course, is to use your IRA money and avoid debts and high-interest payments. In this way, your B and B’s initial cash flow can be reinvested into operational expenses, not paying off loans.
The account structures that are used to enable business purchases with retirement funds are not for the do-it-yourselfer. There are expert retirement account facilitators who specialize in setting up these structures. Beware, though: not all account-facilitation companies are created equal. It’s best to choose one with a solid history of structuring thousands of these accounts and one that enjoys a good reputation in the industry.
According to David Nilssen, CEO of account facilitation company Guidant Financial Group, the IRA and DOL have little tolerance for incompetence. “A poorly structured account or gray-area transaction could trigger the loss of all your hard-earned retirement money,” he says. “A qualified professional can help you adhere to the guidelines and can steer you toward success.”
Fortunately, the Internet has made it easier to track down good and reputable account facilitators. Many offer free consultations and provide educational materials or free website seminars. So do your homework!
And as long as you’re doing your homework, make sure you understand the benefits and drawbacks of the B and B business. Check out websites like http://www.yellowbrickroadnl.com/ or http://www.paii.com/ (Professional Association of Innkeepers International) to read up on the ins and outs of this niche within the hospitality industry.
Although B&Bs can be hard work, the benefits of indulging your independent spirit can’t be beat. You’re meeting fascinating people from around the world, you’re letting your decorator, chef and gardener alter egos run free, and you’re living out your dream.
By taking advantage of purchasing your B&B with IRA monies, the next time you find yourself sitting on a charming B&B porch in a rocker enjoying the view, it could be your own rocker, your own porch and your own view!
2 comments:
I'm new at this but I thought husband and wife can not own a business together with Self Directed IRAs?
We posed your question to our Senior Account Manager Forrest Moore:
The process that allows spouses to combine retirement funds for the purchase of a business requires careful attention to compliance with a specific set of laws that Congress passed back in 1974 specifically for that purpose. In general terms it requires creation of a corporate entity and company 401(k) plan. The laws permit a specific type of securities transaction between a Corporation and its own 401(k) plan that provides an exemption to the rules that normally prevent spouses from combining retirement funds and permits other action that would otherwise be banned. If you would like more information, or if you’re ready to launch a business using your retirement funds, please give us a call. We would be happy to share our expertise.
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