People always ask can I buy a Business with 401(k) funds? How can I use my IRA to finance a business?
There is really only one way to use 401(k) or IRA funds to start a business without tax or penalty. The structure involves the formation of a C Corporation and the adoption of a 401(k) qualified plan. Your existing retirement funds can then be rolled into the newly adopted 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. The new corporation will then use those funds to purchase a new business or franchise tax-free!
Using the Rollover Business Acquisition structure, one can use 401(k) Plan funds to buy a new or existing business or franchise tax and penalty free while being able to earn a reasonable salary from the business. The Business Acquisition Solution is the only IRS approved structure for using IRA or 401(k) plan funds to buy or finance a business you will be actively involved in.
The following describes the steps to create an account structure that allows you to buy a business with 401k funds. A retirement account facilitator can help you roll existing funds into a new business or franchise with the following steps:
- Form a Corporation. The Corporation Sponsors a 401(k) Plan which has been designed to allow for investment into your corporation
- Rollover IRA, 401k or other retirement funds into to new 401(k) Plan
- New 401(k) Plan Invests in the Corporation
- Your new 401(k) Plan purchases stock in the corporation. This 401(k) Plan now holds stock in the corporation and the business is debt-free and cash-rich from the sale of the stock. At this point, the corporation will now be able to purchase your new business or franchise.
- Buy a business with retirement funds
Many entrepreneurs will take a taxable distribution from their retirement plan in order to come up with the necessary capital to purchase a business. There is, however, a much better way to use your retirement funds to help purchase your business. This funding solution is a combination of a 401(k) and a corporation.
Your retirement account actually takes ownership by purchasing stock in the corporation – similar to your IRA purchasing shares in a publicly traded company. The benefits? You have 401(k) plan for your new business. As the company prospers, the value of the retirement plans investment increases – tax deferred. And, there is no loan and thus no payments.