Financial Roulette

Worth The Risk?

All this is why an idea as cockamamie, ill-advised and downright dangerous as taking money from your IRA, in certain circumstances, isn't such a bad idea after all. Although people will call you crazy if you even think of taking money out of an IRA to fund a business, there can be a gaping hole in the logic behind those people's complaints. In McCain's case, the lapse in the logic is that her IRA, funded with $1,000, is just about the only asset she has. She can scratch her head wondering where to get $1,000, or she can roll the dice, get on with life and perhaps make a lot more money that she ever could playing it safe.

Here's another reason for McCain to tap her IRA: Entrepreneurs who don't put themselves in some form of jeopardy to get their businesses off the ground often preclude the participation of other investors. Banks, family members and angel investors don't like to be the only ones at risk in the deal. The thinking goes, "If you're not willing to risk it, why should I?" Entrepreneurs who do take these kinds of risks often find that financial partners, would-be or otherwise, are much more receptive to financing proposals.

McCain, though not totally comfortable with the idea of drawing on her IRA, is doing it anyway. "I see it as a way to accelerate the process," she says. "I can plod along, or I can put my money where my mouth is." And, in truth, while raiding one's own pension fund simply can't work in a lot of deals-i.e., never use it to fund biotech research and development-it works beautifully for the rapid inventory turnover business McCain has chosen.

Once McCain finally gets her hands on her money, she can use it to get $1,000 worth of inventory. If all goes well, this $1,000 in wholesale goods will generate $2,000 in retail sales. As a result, she only has to sell half her inventory in 60 days and get it back into her IRA before she'll suffer any penalties. In fact, the wiser entrepreneurs might suggest that putting herself under the gun like that is the best thing that McCain can do to jump-start her business. The real beauty of the plan is that if she sells out her inventory and makes $1,000, she can finance her next purchase of inventory with profits rather than her nest egg. In short, by taking on some risk, McCain gets her assets to work for her.

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This article was originally published in the June 2000 print edition of Entrepreneur with the headline: Financial Roulette.

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