If you have been considering starting a new business, or purchasing an existing business, you have probably been considering first how to capitalize your investment. Did you know you could use your retirement funds to finance a business without having to pay taxes and penalties? Enter a new form of business financing that relatively few are familiar with today- 401(k)s, IRAs and other tax deferred retirement plans. The IRS has labeled this type of retirement investing “Rollovers as Business Startups” or “ROBS”. Self Directed 401(k)s are somewhat of a relatively new concept in business financing, which can help business owners capitalize an existing business, or finance a new business start up tax-deferred, and without taking a distribution and incurring costly penalties. It’s not a secret any longer, and has been legal since privately managed retirement plans were first created in the ERISA act of 1974.
Companies promoting self directed 401(k) plans have finally been gaining exposure in the media, an important step in making this type of investing a well known common form of business financing. The Wall Street Journal, Kiplinger, Entrepreneur Magazine, Business Week and other major publications have all ran articles featuring these companies and self directed rollover products.
Common Business Expenses you can use your 401(k) funds for:
• Business purchase
• SBA loan down payment
• Business purchase down payment and debt payments
• Ongoing business expenses
• Inventory
• Equipment
• Leasing expenses
• Employee compensation
• Company vehicles
• Licensing
You can not use your 401(k) to pay yourself your salary initially, it MUST come out of the business revenue, although it does not nee to operate at a profit initially to take a salary.
If you are dissatisfied with your current returns in the stock market, consider investing in yourself instead. Your 401(k) stands to gain in value from your own hard work and productivity, while also giving you the ability to substantially reduce or eliminate the amount debt necessary to finance your business. Business owners using these types of products have experienced a tremendous amount of success, reaching profitability much faster since they have substantially reduced or eliminated the ongoing expense of servicing loan payments and paying interest on their debt from revenues. This means they are putting more of their gross revenue into their profit margins, rather than sending them back to the bank.
Retirement law and taxes are complex. There are many rules to be aware of, and not everyone qualifies for this type of financing. Contacting a self directed 401(k) business rollover provider can help you better understand your options, and rules associated with these programs.
Choosing a 401(k) provider
Rule #1- Do your research. Just like picking a financial advisor, CPA, doctor, or a lawyer, it is important you choose the firm with the best reputation and track record to protect your business interests. You want to be sure your provider is looking out for changes in the tax code and making sure their clients are protected from costly mistakes.
Since there are relatively few barriers to entry in the marketplace, you want to be especially weary of start up companies offering a substantially reduced price for “the same” product. Unfortunately a lot of these fly by night companies have been recently shut down and sued in court due to falsely advising their clients and improperly setting up their business structures. It can be a costly mistake, trying to skimp a couple hundred bucks upfront only to be hit with many thousands in legal costs and penalties later. It is not a pretty picture. That is why you should choose a firm that offers attorney counsel, particularly with an independent ERISA tax attorney, that is bar bound to represent you and your best interests.
An ERISA attorney is equivalent to a specialist in retirement law and taxes. Also, due to attorney client privileges, an ERISA attorney can never testify against you in a court of law should it ever come to that point in a very bad situation. A CPA can, and must do so, under the threat of losing their license to practice if subpoenaed under law. It is always in your best interests to prepare for the worst. Choose a provider that does not overcharge you for additional support if you have ongoing questions about your plan. Chances are you probably will need ongoing support. You will also need to hire a 401(k) licensed record keeper and administrator or the plan by law. It is best to hire a firm with in house recordkeeping, which will keep your costs lower, and provide better ongoing support when needed. Also, never trust a firm who manages your business funds for you, or charges asset based fees or transactional fees. It is your business, and your future, so you always want to have control of the checkbook. You don’t want to be ripped off for your retirement money.
About The Author: Cyrus Safavian is a 401(k)/Retirment Plan consultant who specializes in assisting individuals utilizing their retirement plan(s) funds to purchase a business (or down payment) without incurring taxes or penalties in the process. Also view the schedule of upcoming FREE online webinars given monthly on this topic. Cyrus can be reached direct at 425-647-5593.
Watch for more blog posts / articles from me in the future!
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