You enjoyed Turkey for Thanksgiving (and leftovers) and decide that a turkey farm is a good investment for your retirement dollars. What are the differences in purchasing this farm through a self-directed IRA or a rollover business startup?
What is your level of involvement with the farm?
The first question I review with clients who do not know whether they want to purchase an asset via a ROBS or SDIRA is their own level of interaction with the asset. Do you
- plan on working for the farm?
- want to hire family members?
- desire a personal supply of turkey for your kitchen?
- need a personal share in the income (versus taxing deferring all of the net income)?
If a client intends to create prohibited transactions (PT) that would disqualify an IRA, then I recommend a ROBS. If not, then we look at the next question.
Is the income taxable?
The unrelated business taxable income rules make any business income taxable to IRAs. While the creation of taxable income is not, by itself, to steer someone toward an SDIRA or ROBS, it is a factor. The corporation created by a ROBS setup is a tax-paying operating company. The IRA would pay taxes similar to the Corporation.
However, the expenses that are deductible to an IRA are not as broad as the expenses available to corporations. The percentages of income are the same, but deductions are not. The corporation will usually end up with a lower net income.
I refer people to their local CPA for a 100% answer to this question as it also involves state tax issues. Most clients who start out looking at an SDIRA and then find out that the income created by their idea will be taxable switch to a ROBS setup. Not because the ROBS idea is significantly less expensive (it isn’t) , but because the ROBS avoids PT issues so they sleep better.
What is the exit strategy?
Sometimes people want to create a business that is kept in the family. If the client’s goal with the turkey farm is to pass it on to children, they need a ROBS. Selling an IRA asset to any disqualified person is prohibited. The other differences in an exit strategy are not as important in the SDIRA v. ROBS decision. The end result is nearly the same even though the steps differ.
If you need help evaluating your idea to decide which method will work better for you, please call 425.990.1021 to set an appointment. I understand the intricate details of each idea. Working together, we can ensure that your qualified funds idea is created using the best approach.