The most common one, especially for startups, is that the initial investors are typically the manager and his or her family and friends. They want to put in money from their own pockets and from their own retirement accounts. If done right, which will take sound advice from competent counsel, such combinations may be possible under the rules. If done incorrectly, there can be some ugly consequences to the fund, the retirement account and the account holder.
Such consequences include anywhere from 15%-100% penalties, disqualification of the account, immediate distribution of all of its assets as ordinary income and possible early withdrawal penalties to account holders who conduct prohibited transactions in their IRAs. It is imperative that investors know the rules and receive good advice.
Visit our eBooks page for additional education materials on prohibited transactions. You can also view the IRS web page that discusses prohibited transactions here.