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Invest in a Startup Business with an IRA

…But First You Must Have the Right Type of Retirement Account!

Fund A New Business with an IRA?

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Video Highlight Reel

[0:12] Terry shares the lessons he learned working in construction and how those lessons correlate to investing.
[0:58] What does it mean to choose the right tool?
[1:25] Buying stock at a brokerage house is like using a hammer – impactful, not precise.
[1:52] How is small business investing like using a screwdriver?
[2:38] Will there always be risk involved?
[2:55] Sunwest Trust is the right tool – we’re always here whenever you need us.

Specific Tools for Specific Jobs

In the construction business, you need specific tools for specific jobs. If you have the correct tools for the job it will be more manageable and efficient. The same is true for electricians. As I said before, as a kid, in the summers, I worked for father’s construction company. I was usually assigned to the framing crew, but one summer I got to trade in my rigging axe and my position as a framer for a job inside with the electricians. This required a new set of tools and a new set of skills, but I enjoyed challenging myself. I quickly learned that a hammer was replaced with a screwdriver because when you’re working with electricity you scale back on brute force and embrace finesse to ensure everyone’s safety.

Buying Stock or Marketable Securities in an IRA

Let’s say the hammer represents buying stock in publicly traded businesses; like Apple, IBM, Facebook, etc. Whereas the screwdriver represents buying more particular stock, for instance, in your neighbor’s coffee shop, or your best friend’s landscaping business.

Let’s just imagine for a second your brother-in-law, Mike, makes the best beef jerky in the world. He’s done it for years and he’s run a successful business plan past you for ideas and any help you can give him. As part of helping him get started you decide to invest $10,000 to get him on his feet. And for this example, lets say that you don’t have $10,000 cash to give, but you think its a great business plan and you’ll get your money back in time (plus you’re helping family). You don’t have the cash, so you turn to your IRA. You call your broker and tell him you want to buy shares of Mike’s Beef Jerky in Albuquerque, NM, but as most brokers will tell you, they do not facilitate IRA transactions, which allow you to invest in private businesses.

Diversify Beyond Traditional Assets

Although a traditional brokerage house may turn down your investment, you are still in luck. If you still believe in Mike’s vision, this is where you would need switch tools and find the right tool for the job. Instead of using a hammer, try a screwdriver. In the business example above, a self directed IRA would be a more optimal tool for your investment idea. For example, if you had a self directed IRA instead of a standard IRA, you would be able to invest $10,000 in Mike’s Beef Jerky in a matter of days so long as the transaction was compliant with the Internal Revenue Code.

Steps to Investing in Local Business with an IRA

To make this investment it would only take a matter of submitting one Direction of Investment form to your IRA custodian. The turnaround time is different for every custodian, but it’s likely that the transaction can be completed within a few days.

You can see from the example that the situation dramatically changes when you have an arsenal of tools to use instead of just one. This is not to say that one tool is better than the rest, but from time to time you need specialized tools for specialized jobs, and unfortunately you will never know the importance of the correct tool until you’ve tried to use the incorrect tool in the first place.

Self directed IRA Investing Requires Due Diligence

This blog content is strictly for educational and informative purposes only and should not be taken as legal advice. Self directed IRA investing involves doing your due diligence on every investment. Be sure to speak with a lawyer, or tax professional who is knowledgeable in the types of investments you are considering.

Key Takeaways

In order to invest in alternative assets you must have the right investment vehicle.
With an appropriate self directed IRA with the proper custodian, you can fund a local neighborhood business.
Investing requires proper due diligence. Seek help!

Video Transcript

Last week on Tuesday at Two, I explained to you that I grew up in a construction family. My dad was in the construction business most of my life. One of the big advantages I had was once I got into high school, I got to choose each summer what I was going to do.

So for the most part, I worked as a framer like I said last week. But for one summer, I got to work with the electricians, which I really enjoyed because it was different. It was fun to learn how to do it.

As an electrician, when you first go into a home and run the electrical wires, which is called a rough-in. So you go in and pull the wires and you nail electrical boxes to the walls and that kind of stuff. And then later on after the house is almost ready, you go in and do what’s called the finish. That’s where you put in the plugs and the switches and the covers for those.

As you’re doing that, going along this theme of tools again, when you’re installing a receptacle into an electrical box, you use a screwdriver, which is what I have here. This is a specific tool for putting screws into pre-drilled holes. So you put those screws in there and that holds the plug in and then that holds the cover on top of it. It would be impossible to install an electrical outlet with a hammer.

In just the same way, this might be what you would use if you want to buy stock in Apple, IBM, Facebook, those kinds of things, any marketable securities that you would be buying at your brokerage house that you may already have an account with.

But let’s say you want to do something a little more particular and your neighbor is starting a company. One of our particular investors I know invested with a neighbor who is starting a company to make beef jerky. So if you called your brokerage house up and said, “Hey! I want to buy stock in Mike’s beef jerky,” probably after they stopped laughing, they would say, “Well, why would you want to do that? But even if you are sure that’s what you want to do, you can’t do that with us.”

You would need something a little more specialized like Sunwest Trust, like this screw driver was for installing electrical outlets.

That’s the difference between what the brokerage house can do in buying the marketable securities and things that are traded on the New York stock exchange or the NASDAQ exchange and what you can do at a custodian like Sunwest Trust where you can invest in that little neighborhood coffee shop or neighborhood business that somebody you know that’s struggling and working hard and really going to do well.

The thing you have to know is sometimes those might do well. Sometimes they might not do well. That’s the risk involved with every stock you buy. If you had bought in around a few years ago, you thought it was doing well and it turns out it wasn’t doing as well as you thought. Those risks are always inherent.

But choose the right tool for the job you want to do. And here in Sunwest, we like to say that we are the right tool when you need us. So when you’re ready to invest in that private company with your retirement funds, Sunwest is the place to come and we can provide you with the access to be able to do that.

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.