The Bottom Line: Starting your own company using your IRA

One year ago, 39-year-old listing agent John Bacon was a $10-million-plus producer with an assistant and buyer’s agent working out of Keller Williams Realty’s Portland Premiere office. Yet he dreamed of opening his own office and expanding his team.

            Thanks to his self-directed IRA (and Keller Williams’ Mega Agent Office policy), today he runs The Bacon Group LLC. The five-person team works from The Bacon Group’s own Keller Williams’ branch in the Portland, Oregon, suburbs. And all the profits -- after paying commissions, salaries and regular business taxes -- go to his Individual Retirement Arrangement.

            “The IRA actually owns The Bacon Group LLC, and I’m a commission-based employee of it,” Bacon says. “If I wanted to, I could even take out money for managing it.” (It’s up to each IRA custodian whether it will allow this.)

            Here’s how his tax attorney, Drew Miles of CheckbookIRAmagic.com, says he structured the deal to comply with Internal Revenue Codes and the Employee Retirement Income Security Act (ERISA):

            1) Miles opened a self-directed Roth IRA for Bacon at a self-directed custodian allowing IRA investments in real estate and in LLCs. Any single filer with a modified adjusted gross income of $110,000 or less that year ($160,000 for couples filing jointly) can open a Roth IRA.

            There’s no annual tax deduction for deposits into Roth accounts, but the bonus here is that there’s no tax on the withdrawals, no matter how big they’ve grown. (Remember, you can start withdrawing tax-free from this account at age 59 ½, or sooner if the money is going to pay first-time home buyer or disability expenses.)

            2) Miles set up The Bacon Group as a Limited Liability Company. The process requires a specialized operating agreement. Bacon’s was drafted with help from legal counsel and custodian, and filed in Oregon.

            3) Then, in June 2006, Bacon used a commission check to make his first retirement account deposit: $4,000, the maximum for someone younger than 50. It’s $5,000 for those 50 and older.

            4) Bacon then instructed his IRA custodian to make his first IRA investment: acquisition of The Bacon Group LLC. With the business not yet active, $4,000 allowed for a fair purchase price.

            Bacon worked with Miles to complete the ownership transfer, and filed the paperwork with his custodian. “You’re basically buying the stock -- the membership units -- with the money in your IRA, very similar to buying stock in Microsoft,” Miles explains. “The difference is you’re buying 100 percent instead of 1,000 shares.”

            5) Then Bacon transferred ownership of a rental property he personally owned to the new LLC. This way, says Miles, Bacon wouldn’t violate the Internal Revenue Codes against “self dealing” with his IRA. It’s the business, not the IRA, that buys the property.

            6) Next up was selling the LLC-held rental property to fund company growth. “The real estate went through the escrow company and the cash for the sale was deposited into the IRA business system,” Bacon says. “The LLC bought it, owned it and sold it, but only after the IRA acquired it.”

            Flush with cash from the property sale, Bacon used this IRA money to move to new office space, hire an office manager, bring in three agents, and provide the office and marketing supplies they’d need. Plus he was able to afford for his IRA to buy another rental.

            So The Bacon Group LLC was born. And it’s his retirement that will benefit.

            “The IRA takes the profits after paying bills and commissions, and then it can invest as well,” Bacon says. “It just makes sense.”

 

 

For more on this topic, read Ms. Meacham's follow-up post: "The Bottom Line EXTRA: Save by setting up your own LLC."

 

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		 Jennifer D. Meacham, Gather Money Correspondent
	Jennifer's column, "The Bottom Line," is published every week to the Gather Essentials: Money channel. Jennifer covers money matters for RedwoodAge.com and self-directed retirement account investing for RISMedia. She's co-author of the best-selling retirement investing guide "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" (Square One Publishers, New York). Keep up on the latest news and analysis into how you can take control of your business and personal financial future by joining Jennifer's "Self-Directed Investing 101" network.

 

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