Investment Funds: Where Do Your Sources Of Money Lie?

Knowing the source of investment funds is crucial for financial institutions and companies alike. For individuals, common sources of investment funds include salary, stimulus payments, gifts, and inheritance. For companies, the main sources of finance are retained earnings, debt capital, and equity capital. Companies may also obtain funding through crowdfunding, donations, grants, and government subsidies. Understanding the source of investment funds is essential for evaluating financial situations, growth plans, and strategic goals, ultimately contributing to successful financing and ensuring compliance with anti-money laundering (AML) regulations.

Salary

If you work for a company, your employer may pay you a salary, or they may pay you an hourly wage. If you work in sales, you may earn commissions. Taxi drivers and restaurant servers can earn tips, which also constitute earned income.

If you are employed, your salary may be the first source of income that comes to mind when considering investment funds. However, it is important to remember that there are other sources of income as well, such as passive income and portfolio income. Understanding the different types of income streams can help you plan for your future and make informed investment decisions.

In addition to salary, other sources of investment funds include:

• Tips and commissions
• Profits from selling goods or providing services
• Interest, dividends, or capital gains on investments
• Gifts, allowances, or inheritances
• Government benefits and tax refunds
• Withdrawals from retirement or pension funds

Stimulus payments

The Economic Stimulus Act of 2008 was signed into law on February 13, 2008, to provide targeted, immediate financial assistance to individuals and families across the country. The responsibility for distributing this one-time payment to taxpayers was assigned to the IRS right in the middle of filing season, which is the busiest time of year. The IRS understood that the point of the economic stimulus was to provide a stimulus to the economy, and so tried to balance getting the checks out as quickly as possible with some of the operational realities of doing so.

Gifts/Inheritances

Gifts and inheritances are a common source of investment funds. However, it is important to understand the tax and legal implications of such funds, as well as the potential challenges and best practices associated with their use.

When receiving a gift or inheritance, it is crucial to ensure that the appropriate taxes are paid. In the United States, the individual giving the gift must file a gift tax return (Form 709) if the total value of gifts given to at least one person (excluding their spouse) exceeds the annual exclusion amount. For 2023, this amount was $17,000, and it increased to $18,000 in 2024. Additionally, if the gift is in the form of property or interest in property, the giver may be required to report the transaction to the IRS as a taxable gift. It is important to note that gifts above the exclusion amount are taxed at the relevant rate, and it is the responsibility of the donor to pay this tax.

When using gifted funds for investment purposes, it is important to be aware of the rules and restrictions set by lenders and mortgage programs. While there are no specific laws prohibiting the use of gift money for investment properties, lenders often place restrictions on the amount of the purchase price that can be covered by gifts. They also typically require clear documentation to prove the source of the gift funds. This documentation may include proof of funds, a gift letter confirming the amount, relationship to the borrower, and the purpose of the gift, relationship verification documents, gift transfer documentation, and the borrower's acceptance of the gift funds.

In the case of inheritances, it is important to understand the tax implications, especially when inheriting various types of assets. For example, if you inherit securities, you may need to pay taxes on any capital gains realized from their sale. Inherited IRAs also have specific tax rules depending on the type of IRA and your relationship to the decedent. In most cases, you will not owe tax on the amount inherited, but distributions from a traditional IRA will be taxed. For Roth IRAs, withdrawals are typically tax-free, but the account must be depleted within five years.

When receiving an inheritance, it is advisable to take your time in deciding how to use the funds. Seeking professional guidance from a financial planner can help you make informed decisions and create a long-term financial plan. Additionally, it is important to work with the executor of the estate to ensure that all assets, such as securities, retirement accounts, real estate, or business interests, are properly transferred to your name.

In conclusion, gifts and inheritances can be a significant source of investment funds, but it is crucial to understand the tax and legal implications, follow the necessary documentation and reporting requirements, and seek professional advice when needed.

Angel investing

Angel investors often provide support to startups at a very early stage, when the risk of failure is relatively high, and when most investors are not prepared to back the business. These investors provide seed money, usually in exchange for ownership equity in the company. They are not providing loans, but rather investing in an idea they like, with the expectation of a reward only if and when the business succeeds.

Angel investors are often retired entrepreneurs or executives who are interested in angel investing for reasons beyond pure monetary return. They may want to keep up to date with current developments in a particular business arena, mentor a new generation of entrepreneurs, or make use of their experience and networks on a less than full-time basis. Angel investors also provide feedback, advice, and contacts, in addition to funds.

Angel investors connect with startups in need of cash through various paths, including angel groups or networks, friends and associates, online or crowdfunding platforms, and direct contact with entrepreneurs.

Angel investors typically want 10% to 50% of the company in exchange for funding. This means that business owners could lose control of their business if the angel investors determine that changes need to be made for the company to succeed. It is important for business owners to carefully consider how much equity they want to give away to an investor.

Venture capital

VC firms raise money from limited partners (LPs) to invest in promising startups or larger venture funds. The funding typically comes in the form of private equity (PE), where ownership positions are sold to a few investors through independent limited partnerships (LPs).

The different stages of venture capital funding include:

• Pre-seed funding: The earliest round of financing, often provided by friends and family, angel investors, startup accelerators, or venture capital funds, to prove a new idea.
• Seed funding: The initial stage of funding for a startup company, typically occurring early in its development, to finance the initial operations and development of a business idea.
• Early-stage funding: Funding required once a business has developed a product to ramp up production and sales before becoming self-funding.
• Growth capital: Funding required by companies that have found product-market fit to scale their business.
• Exit of venture capitalist: VCs can exit through a secondary sale, initial public offering (IPO), or acquisition.

Overall, venture capital plays a crucial role in providing funding and support to startup companies with high growth potential, helping them navigate the challenges of the early stages of their business journey.

Frequently asked questions