If you haven’t noticed yet, I’m kind of in love with the Roth IRA.
Having launched the Roth IRA movement, it’s a safe assumption that I think everybody should have a Roth IRA. Heck, if there was a way to open up a Roth IRA for my dog, I would definitely do it.
Several years ago a close friend of mine started investing into a Roth IRA. I was super pumped because any time a young adult starts putting money into a Roth IRA, I don’t see the $50 per month they put into it. I see the potential of hundreds of thousands of dollars they will have tax free at retirement. Getting started earlier on in life is so huge, and it motivates me to be the catalyst behind that.
My friend had been adding money into his Roth IRA for several years and was doing this while launching his brand new photography business. I was really impressed by the fact that he was able to stay in the black from going off on his own and starting a new business while also putting a decent sum into his Roth IRA.
You Wanna Do What?
He continued to do this for several years until the day that he called me. Him knowing how much I loved the Roth IRA, I could tell some hesitance in his voice as he asked me,
“Hey, Jeff. I’m considering cashing out my Roth IRA so that I can take that money and invest it into my business.”
At first I was appalled. What a stupid idea! Did he not realize all the tax-free money he would have at retirement?
My initial response definitely was very unsupportive. I didn’t voice that with him though as I always like to just chew on things a bit to see it really makes sense.
I remember first asking him, “Are you sure you really want to do this?” He responded that he had thought about it a lot, but he had some equipment that he felt if he had it, the return on his investment would be much more than he would realize, especially in the long term, than the Roth IRA.
Now, at the time I was still a W-2 employee, a broker from my previous firm, so I hadn’t quite grasped the business owner concept. At the end of the day I gave my friend the benefit of the doubt basically because I knew he had already made up his mind. My friend began investing early into his Roth IRA, cashed it out, paid some penalties, paid some taxes, and invested the proceeds into his photography business.
Fast forward to present day my friend is known as one of the most premier photographers in our region. He has been able to grow his brand and his business way beyond profitable. He takes several vacations a year, including a one-month vacation in January, which allows him to get a break from his day-to-day operations. In hindsight, him cashing out his Roth IRA paid huge dividends that, although hard to measure, definitely give the impression that has proved to be much more valuable that the Roth IRA could have done.
As you can tell, that experience has made an impression on me because I know that opening a Roth IRA and investing in the stock market is not the only way to go. There are many other ways to make money in investing, and in my experience I have learned not to be so one sided. People can invest in businesses, real estate, partnerships, and many other instruments that will yield them very handsome returns.
So, what do you think? Would you ever advise anyone to cash out a Roth IRA to invest in their small business? What would your response have been?