401 K Business Funding
Thinking about taking money out of your 401(k) to start a business?
Becoming an investor and owner of a business does have many benefits but you should be very cautious about using your nest egg. More importantly there are significant legal steps you need to know so you don’t end up making costly mistakes.
Pulling money out of your 401(k) isn’t simply a decision of writing yourself a check. Do this wrong and you risk paying a 10% penalty if you are under the age of 59 ½ plus incomes taxes anywhere from 35%+ depending on your current tax bracket.
Let’s put this in perspective.
If you pull out $100k out of your 401(k) it can cost you $31k of that money in penalties and income tax. So instead of $100k you now have only $69k to invest in your new business. Ouch! Not too worry, the good news is rather than losing thousands of dollars of your hard earned money there is a better way.
It’s called a Business Directed Retirement Account.
This 401k business funding strategy is nothing new; it has been around for decades. It allows you to make your 401(k) plan an investor in your own business. Have you heard of the federal government’s Employee Retirement Income Security Act? It allows people to roll over existing 401(k) plans into a plan created for a new business.
Just like your 401(k) invests in publicly traded stocks; you’re basically doing the same thing but into a private stock which is your own business. For thousands of startups, this funding strategy works. According to FRANdata, 4,050 businesses – 60% of them franchises – were launched with retirement rollover money.
Now keep in mind, using retirement funds to start a business is not a do-it-yourself transaction. It is extremely complex and requires the help of a financial planner or third-party retirement-plan administrator. The process requires complying with a long list of IRS regulations and avoiding making certain prohibited transactions.
It requires setting up a C Corporation and a brand new 401(k) customized specifically for this type of strategy with all the IRS rules that go along with it. The penalties for not complying with the rules are hefty to say the least.
This strategy makes sense if you plan to invest $50k or more of retirement funds in a business. With a business directed retirement account you can start a business relatively debt-free, increasing the chances of you becoming profitable much faster. Through this funding strategy you can be the investor and owner of your business.
With 401(k) business funding you have the unique ability to base decisions as either an investor or business owner depending on what you believe is in your best interest. While it may seem risky – starting a business is risky no matter how it’s financed.
Need expert advice setting up a business directed retirement account? Submit your contact information below and a BDRA funding specialist will contact you within 24 hours. Plus receive my Business Credit Seminar audio FREE ($597 Value)=>
To Your Success In Business and in Life!
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.