Should I raid my IRA to grow my business?

(FSB Magazine) -- Dear FSB: I'm thinking of withdrawing funds from my IRA early to invest in building the next phase of our guest ranch - Mongolian-style yurts - on the land we own. My partners and I expect the expansion to generate solid revenues. Should we consider using retirement savings as a source of capital?

- David Capocci, Co-Owner, Paca Pride Guest Ranch Granite Falls, Wash.

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Dear David: According to Martin Robins, a lawyer in Buffalo Grove, Ill., who often advises entrepreneurs seeking to raise capital, you should only think of tapping into an IRA when you have several decades before you plan to retire - and even then, he dislikes the idea. "Taking money from an IRA will cost you 10% of the balance of the IRA in penalties, and the amount you withdraw will also be subject to state and federal income tax," says Robins (mrobins@mr-laws.com). "Your withdrawal could even bump you into a higher tax bracket."

You can't borrow against your IRA as you can with a 401(k). Instead, you can pull funds out for only 60 days before incurring penalties or taxes. Robins says that while you could secure a short-term bridge loan in this way, the option is rarely used and unwise. Instead of taking drastic steps, Robins urges you to seek financing from a bank or other lender. "Credit has tightened up, but lenders still want to work with profitable small firms like yours," he says. "And your ownership of land - as opposed to developed real estate, which is less desirable these days - is an advantage."

Another option: a sale-leaseback deal that lets you sell the property to an investor and then lease it back long term. You might also consider equity financing - that is, selling a share of the business. Robins warns that "while lenders and investors aren't always right, if they regularly turn you down, they may see a problem that you don't."