In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about using retirement funds to start a business, investing in Bitcoin with retirement funds and contributing to a Solo 401(k) with an S Corporation.
Question 1 from Kevin B in Syracuse, NY: I want to buy a business that I will be involved in personally and need about $45k to start – I have about $100k in retirement funds – do I have options? Thanks.
Since Kevin wants to be personally involved in the business, he can’t simply use retirement funds to invest. That leaves him three options: take a distribution, borrow 401(k) funds or use the ROBS structure. The worst idea is withdrawing money from the retirement plan via a taxable distribution. Obviously, all funds withdrawn from a traditional IRA or 401(k) is treated as taxable income. Plus, if you are under age 59 1/2, you would be hit with an early withdrawal penalty.
Next, is ROBS, or Rollover for Business Startup. This involves rolling over retirement funds into a new 401(k) plan which would invest in the business. It can be quite complicated, and actually, is not needed in Kevin’s situation.
That leaves the loan option. You are allowed to borrow up to $50,000 or 50% of your 401(k) balance, whichever is less. Kevin can borrow the $45,000 he needs to start his business. He must adhere to the loan stipulations, which are generally repayments must be made at least quarterly and at an interest rate of at least Prime (a low 3.50% as of March 28, 2022). If Kevin is self-employed, he can set up a Solo 401(k), borrow the funds and buy his business.
Question 2 from Zack P in Madison, WI: The price of Bitcoin is skyrocketing – what do you think about using some retirement funds to buy?
If you follow Mr. Bergman, you know he’s a big believer in Bitcoin and cryptocurrencies in general. While he doesn’t offer investment advice, he will tell you that he has invested in Bitcoin and other cryptos. He’s a firm believer in Bitcoin, and the technology behind it, and has invested a small percentage of retirement funds in it.
The best way to invest in cryptos is with retirement funds. Moreover, a Roth IRA will allow your Bitcoin investment to grow tax-free. Of course, digital currencies are still relatively new and quite volatile. But, the risk/reward may be worth it for you. Of course, this depends on Zack as an individual. There’s no one right answer that covers everyone. Bitcoin has proven it’s here to stay, and it’s no riskier than investing in a friend’s start-up, a new real estate project or the next big tech stock.
Question 3 from Lila F in Fort Myers, FL: I have an S Corp and a Solo 401(k) and want to make a big contribution this month – can I just increase my W-2 for December so I can make a bigger contribution?
The answer is yes, especially for small businesses unsure of their cash flow. If you’ve taken a lower salary throughout the year, especially this year with the COVID-19 pandemic, you can give yourself a bump in earnings towards the end of the year. Obviously, you cannot contribute more than you earn.
Alternatively, you can give yourself a bonus, but it must be done before December 31 since you have an S Corp. Therefore, if your business did better than you thought and you can afford to give yourself a boost in salary for the last weeks of the year, it’s completely within the rules. This will allow Lila to contribute what she wants to her Solo 401(k).
AdMail – Keep it Coming
We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].
As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!