California is home to some of America’s strongest institutions. Hollywood and up-and-coming technology companies have blossomed in recent decades, but vineyards and wine producers have existed on the west coast for centuries. It’s therefore no surprise that California is known worldwide for top-shelf wine production. Cabernet Sauvignon, Chardonnay, Merlot, and other varieties have been perfected in the hills of Napa Valley and Sonoma Valley. So on this, National Wine Day, pop the cork on your favorite vintage or pour a glass of something new.
California features several famous wine operations, but the door remains open for other, smaller vineyards or wineries. Anyone looking to start a company will likely need investors to catalyze their operations, and retirement accounts can be potent sources of start-up capital. Prospective investors may want to explore alternative investment options, but may not have the money on hand to make a worthwhile investment. Those same investors may have five or six-figure sums available for allocation in their IRAs or 401(k)'s. If you fall under this category and you’ve thought about financing a small vineyard, winery, or any other private company, self-directed retirement investing could be your answer.
Your retirement plan can’t own bottles of wine because, in the eyes of the IRS, they only carry collectible value. However, you may allocate your tax-advantaged retirement dollars toward the business of wine. If a new business owner needs funding for a vineyard or winery, your retirement plan could issue a loan to help fund the business. Self-directed investors enjoy a higher degree of control than passive investment vehicles can provide, all while yielding tax-advantaged income otherwise unavailable to investors who only allocate personal funds. Meanwhile, entrepreneurs can avoid the hassle of applying to banks and fund their fledgling enterprises with relative ease.
As long as a disqualified person doesn’t own more than 50% of the business or hold a key management position, you can approach your plan-held loan in a similar manner to that of a personal transaction. As the plan holder, you’re able to dictate the terms of the loan. Your borrower may request the necessary principal amount, though your due diligence and comfort level will ultimately dictate your course of action. You may also specify the interest rate and payment frequency provided both conditions reflect a genuine business transaction. The interest rate may not be 0%, and you must require at least one payment per year.
Furthermore, you may elect to secure the loan with collateral. Private lenders can mitigate risks and borrowers can reduce their interest payments by leveraging real estate, trust funds, or other personal assets as repayment measures if the loan can’t be fulfilled. A secured promissory note protects investors by reducing the likelihood of a total loss. On the other hand, if you know and trust your borrower, you can reduce your workload by establishing an unsecured promissory note without additional terms regarding collateral.
In either case, an original copy of your loan will be safely stored in the New Direction IRA vault until we receive additional direction from you. To learn more about investing in private businesses via promissory notes, please don’t hesitate to contact our office.