Financing Your Business With Your Retirement Account: How It’s Done
Financing your business with a 401k or IRA is a delicate matter, but the reward can easily supersede the risk. If you have the confidence in yourself to make money for your own retirement rather than relying on the stock market, then this is a fantastic option for you.
The procedure for financing your business with retirement savings is a relatively simple procedure, but still requires the services of a number of key professionals.
First, a C corporation needs to be setup, but no stock issued. The reason for a C corporation is because as a non-“natural” entity that your savings account represents, makes it ineligible for certain other types of corporations. A C Corporation also allows for the business not to be tied to your personal income and other assets.
Next, the corporation adopts a profit-sharing retirement plan (401k) that allows 100 percent of the plan assets ascribable to retirement rollovers to be invested in employer stock (which is a bit of an irony since the Enron days). Your previous 401k from a different employer can then be rolled over to the new corporation’s 401k plan. The money can come from multiple people or sources, a particular benefit if you and a spouse or business partners are going in on the business; this helps in limiting your risk and can give the business more capital. Though from personal experiences, I wouldn’t recommend going in with partners unless you are exceedingly confident in the partnership; you are allowing these people to have some control in the company after all, which represents your retirement money. A spouse, on the other hand, tends to be a great partner, because you theoretically have a shared financial destiny.
Once setup, the company issues all of its shares and transfers it to the profit-sharing plan and receives the cash from the plan. The retirement plan has all the shares in the corporation and the corporation has all the cash. This then allows for the investment into whatever your dream business is.
While this is a simple description of how you can accomplish the business of your dreams using the retirement funds method, you’ll really need the help of a CPA and/or a tax attorney to help with all the details. Be sure that these people are very familiar with the Employee Retirement Security Act (ERISA) which is comprised of the laws in regards to employee benefit plans.