John M Potter: Actually, no I didn’t. But many people do. Doug Zandstra explores why the IRS prohibits funding your business via a self-directed IRA and other prohibited transactions
The IRS does not want you to use your retirement funds for business purposes until you retire.  Using your funds can be very expensive.    The one is the early distribution penalty, the other is the direct benefit penalty, or as it is commonly referred to as a Prohibited Transaction.

A recent tax court decision held that a taxpayer used his retirement funds and triggered a taxable event.  (TERRY L. ELLIS AND SHEILA K. ELLIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.)

What happened was the taxpayer took a distribution from his IRA and bought a car dealership.   It is likely that the taxpayer set up another IRA (in which he has access to the funds), then transferred the funds to the new IRA then used them to purchase the car dealership.

What is interesting is that the court decision does not say that purchasing the car dealership triggered the taxable event.  What triggered the taxable event was that the taxpayer paid himself a salary from the dealership, around $9,000.

The taxpayer was also fined for penalties as well as a substantial underpayment penalty.

There is a special tax of 15% and if the transaction is discovered and not corrected within the taxable period, there can be an enormous penalty – as much as 100%

The general rule is that you cannot benefit directly from your retirement funds until you retire.  It has become increasingly simple to set up and manage your own retirement account.  Many broker firms have self-managed retirement fund options, so not there is even more potential for taxpayers to have the ability to access those funds.

A google search of Self-Directed IRA yielded about 1,250,000 results.  The temptation is out there, but my advice is to stay away from using your retirement, until you retire.