In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses why starting a business during a tough economic environment may be the best time to do it.

Is this the Best Time to Start a Business?

Hey, everyone. Adam Bergman here, tax attorney and founder of IRA Financial. On today’s Adam Talks, going to be sharing my thoughts on whether today or in this economic period, is this the best time to start a business? So, I want to share you my personal story, my thoughts as to why starting a business in a difficult economic time may end up being the best thing you ever did.

So let me start with my story. I was a tax lawyer in New York City from 2000-2008. We all know what was happening in 2008; financial crisis. Bear Stearns, Lehman Brothers, all these banks, mortgage companies in serious financial turmoil, collapse, and the law firm I was at, about a 900 person law firm out of San Francisco, called Thelen, was in financial difficulty. And, it turned out, by fortune, that one of the last assignments I did as an 8th or 9th year tax associate is I researched whether a hedge fund client of the firm could use an IRA to invest in his hedge fund. And at that point I had no idea you could even do that, right? Hard to believe. I was a tax lawyer; had a masters in taxation, and I had no idea that you can actually buy real estate or do an alternative asset in your IRA. I always thought you had to buy stocks or mutual funds. So, I remember researching that and talking to some of my colleagues and saying, wow, I kind of found this little niche industry; I can’t believe it. Do you believe that you can do real estate or gold or alternative assets in IRA or 401(k)? And most of my friends and colleagues at the firm had no idea.

So I said, well, this is pretty interesting. I looked around at that point, this was a while ago, 2008, wasn’t much on the Internet, really bad quality websites. Education was dismal. And there wasn’t really many companies out there giving you good education and giving you a good product, good price point, good technology to make setting up a Self-Directed IRA simple and easy. So I said, hey, this could be a really good opportunity. And a couple of months later, the firm I was at dissolved. And at that point, this was end of ’08, I started interviewing because I knew, I kind of saw the writing on the wall, people were chattering, rumors going around that the firm was in trouble. And I had a couple of job offers and I would have to taken at least 30% to 40% pay cut, smaller boutique firms.

I said, you know what? This is my chance. Yeah, the economy is not in good shape, but I have no kids, I’m married. This is my chance to be an entrepreneur. This is my chance to pursue my dream. And I really believe that this is a really interesting opportunity. Great industry, and so that’s what I did. And I got some really good advice along the way. Prior to finding this Self-Directed IRA niche, I was looking for some business opportunities, entrepreneurial ideas to kind of pursue, and remember talking to a friend of mine’s dad, who’s a very successful software entrepreneur, and he always said, Adam, listen; and I mentioned this on previous podcast, you have skills, right? You know tax law, okay? Find a business that you can use your skills because right when you start your business, you’ll have an advantage, or at least you’ll be on the same foothill as your competitors. Whereas, if you got into the PC business or the carpet business or the window business, your competitors are going to know a thousand times more than you, and you’re going to have to catch up, and it just may be too difficult. So, find a business where you have a skill set that correlates or matches well with that industry. So, once you get in, you already have the pedigree, you already have the ability to compete.

And I kind of took that; I was looking around for different types of businesses involving tax software, legal documents. We tried a legal document company, me and a couple of my friends, and it didn’t work out. But we learned a lot from the failure. Our technology wasn’t good enough. We didn’t kind of prepare in terms of business planning. We didn’t realize that even if we sold enough of these small legal documents, we were going to make enough money that we were going to actually have to quit our jobs. The money we made, even in our best case scenario, wasn’t more than we were making as a lawyer. So we had some good ideas. I think if we executed in better form, we probably could have made it to go that business. But we didn’t. And honestly, the best thing that happened is I learned. And I learned, okay, let me find a business where I can use my skill set, let me prepare, plan. You don’t need to hire a huge accounting firm and run $50,000 worth of projections, but it makes sense to, at least in your head, say, okay, if I maximize and I sell X amount of these widgets or X amount of these services, how much can I make, and is it enough for you to leave your job and pursue it? Right?

In my case, it wasn’t. I remember we did the numbers after we started the business, and we said, hey, if we sell 100 of these agreements a day, which we think is a lot, between all of us, it’s going to be less than we make as lawyers. So, when I started IRA Financial, I ran pro formas; I ran all kinds of different scenarios and budgets and projections. And in every way it made sense. Even in a mid range case scenario, I’m like, I can do this. And that’s what I did. I started it and it took some time to get off the ground. But, because I had a tax background and a pedigree, I was able to come into the industry immediately and do well. And it was a horrible economic time. I launched the business end of ’09, beginning in 2010. People were out of work, real estate was depressed. It was a tough time, but I learned really good lessons, great habits.

If you can succeed in tough economic times, you will prosper when the economy gets better because you’re going to need to cut corners. You’re going to need to be as sharp as you can, work twice as hard because it’s tough in an economic market where there’s not a lot of confidence, it’s a difficult environment to succeed, you’re going to have to work much harder to get where you need to go. And you know what? When you’re starting a business, in hindsight, that was such a positive effect on my work ethic and my business. Yeah, I was a hard working person before, but, trying to build a business in an economic crisis looking back was crazy. But, once the economy rebounded, I was rolling; and the habits I learned and picked up along the way just to kind of build the business really propelled me forward.

So, I think this could be a really great time to start a business, right? We’re in a difficult period of inflation. Who knows when that’s going to end. Markets are down. Job hiring is still relatively strong; so that’s good. The economy has not fell on its face yet, but there are opportunities, right? Whether you’re looking in the crypto market or the real estate market or consulting, there’s going to be lots of opportunities in the next several months that pop up based off the boom and bust cycle that we’re in; where we boom during COVID and now we’re going to bust pretty quickly down back to Earth. So, there’ll be a lot of really interesting opportunities that present themselves based off the way industries end up navigating that period.

So, based on personal experience, sometimes in the toughest economic times is the best time to start a business, learn good habits. You got to work twice as hard, but when you succeed and you survive that period, you’re going to prosper and those habits you picked up are going to help you along the way. So, the last thing I want to end up is if you do want to start a business in these times, you actually have the opportunity to tap into retirement accounts to help you fund and grow your business. Excuse me. And here are a couple of ways you can do that.

Number one, you can do a loan. So if you have a 401(k); so, if you have a business and you have pretax IRA of 401(k) funds from a prior employer, you can set up a company, an LLC, Corporation, S Corp, Partnership. And that business can adopt a 401(k); you can roll your funds into that new 401(k). Then, you can borrow the lesser of $50,000 or 50% of your account value. So if you have, let’s say, $80,000 from a former employer, you start your new Widget business; call it Widget Inc. Set up an S Corp. S corp sets up a 401(k). You roll your $80,000 tax free into the Widget Inc. 401(k). You can then borrow up to $40,000, right? 50,000 or 50%, whatever’s less, and use that for any purpose, including buying inventory, hiring people, paying yourself a salary, whatever you want, you can use those funds for. Caveat: you got to pay back over five years. The lowest interest rate, as of July 2022, is 4.75%. So you’re paying yourself back a nice hefty return, pretty nice stable return. It’s a five year loan, quarterly interest payments. Obviously, if you don’t pay it, there are penalties on what you don’t pay; tax and 10% penalty. But the great advantage of the loan is you get tax-free, penalty-free use of the money. Plus, you’re paying yourself back. So, instead of paying a bank back and getting a 6-7% loan or a credit card loan, you’re getting that money; lesser of 50,000 or 50% of your account value. Use it for anything, including your business, and you’re paying yourself back, which at 4.75% return today is good. Trust me! When you look at where Netflix or Tesla or Apple, Bitcoin, even gold and silver; everything’s down. So, if you get yourself a 4.75% rate of return, you’re going to jump on it.

Something called the ROBS, a Rollover Business Startup solution, which takes the loan to the next level. The way a ROBS works is you set up a corporation for your new business, Widget, Inc; not an S corp, but a C Corp. Widget, Inc adopts 401(k). You then roll your $80K, in our example, into Widget Inc. 401(k), and instead of borrowing the money, Widget, Inc. 401(k) invests the $80,000 into the company. In return, the 401(k) gets stock; that’s known as qualified employer securities. And then under ROBS, which takes an advantage of an exemption to the prohibited transaction rules under 4975(d), you can then use those funds in the business. And you now have your 401(k) that owns a percentage of that business. So any stock sale, the gains will go back to the 401(k) without tax. Plus, you just were able to take advantage of your retirement funds and get tax-free penalty-free use of those funds, which, obviously is super helpful. If you’re starting a business, you’re going to look for capital. Banks may be tightening up just a little bit now with the economic period we’re in. So, tapping into your retirement account tax-free, penalty-free, there’s no cap on $50,000 or 50% of your account value. The only cap is what you have in your retirement account. So, the ROBS solution has been super popular the last month. I’ve done more ROBS than I have in five years. So, that’s a really nice option if you’re looking to tap in your retirement funds to start a business.

You can also take a Roth IRA distribution. So long as you’re over 59 and a half,  the Roth’s been open at least five years: it’s all tax free. Now, if you pull the money out too soon, premature distribution before the 59 and the five, it’s subject to tax and a 10% penalty. Although, Roth IRA contributions, not the earnings, but the contributions, you can always take out tax free. So, if you put in, over the last five years $3 grand a year in a Roth IRA, you have $15 grand in contributions; you can pull those out tax free. The earnings on that, let’s say that $15,000’s now worth $23,000; that $8,000 in earnings needs to stay in til you’re at least 59 and a half and the Roth’s been open at least five years to get the tax-free treatment, but you can pull the contributions out tax free. So, that’s another wrinkle, another potential option if you need to tap into your retirement funds to start your business. You can always, as I mentioned, take a taxable distribution. Not ideal, obviously you’re paying tax and if you’re under 59 and a half a 10% penalty. So, that’s not a really good situation, but that option is there.

You can also do what’s called a 60-day rollover, where once every twelve months, you can pull money out of your IRA and use it for any purpose, but you need to return it within 60 days. And, if you don’t: subject to tax and potentially a 10% penalty. Now, there’s also hardships, but it’s going to be hard to prove hardship to start a business, right? Hardships are more financial, medical, both on the IRA and a 401(k) context. So, the hardship is probably not a great option if you just need the money to start a business.

So all in all, we’re going into or probably entered into a period of difficult financial or economic times. Back in 2008, I didn’t deal with inflation. There was no inflation. It was just collapse of the banking systems. Banks were under-capitalized and the real estate marketplace was poorly, I would say, controlled and regulated. And, we had situations where there were lots of foreclosures and lots of job losses and people had a lack of confidence in the economy. We’re not there yet. Hopefully, we’ll have a soft landing, but we’re definitely not where we were a year ago. Okay? So, it’s tighter now, it’s more difficult. The inflation again, is an element we’ve never dealt with. So, if you have a business idea you’re thinking of starting up, don’t be discouraged just because it’s a tough economic time. Some of the best businesses have started in tough financial times. I remember Airbnb started in 1997, right before the financial crisis, when real estate was depressed.

You have stories of companies starting, whether it’s Microsoft and other companies have started in a very difficult financial time. So. If you believe in yourself and you believe in your vision; starting a business in a tough economic period, maybe they end up being the best thing you ever do because you have to work twice as hard. You’re going to pick up good habits, and if you can survive that economic period, you will have a great chance to prosper and flourish when the economy gets better. So, the one disadvantage I would say is banking; if you need to borrow money, banks are definitely a little tighter now, and they generally are tighter in difficult economic times than in more flourishing financial times. So, that’s probably the one disadvantage. But it worked out for me. I remember my father told me, I remember talking to him, I said, you really think I should do this? Maybe I should take the law firm job. Still six figures, a lot of money and I remember him saying, listen, and I also said that the economy kind of sucks, it’s nice to have a paycheck; and he said, hey, your dream is to be an entrepreneur. You have no kids. It’s your chance. Go for it. If you fail, okay, you fail, you start again, you go back to law, but this is your chance. Don’t let the economy persuade you to move on. If you believe in yourself, you believe in the industry, you believe in what you’re doing. Workplace is hard, you will be good. And he said, you’re going to be forced to push harder and pick up really good habits and cut corners and do whatever you need to do to survive. And those lessons will travel with you and help you along your journey going forward more than you know. So that was from my dad, who was a really successful business guy and some of the best advice I got.

So, that’s why I want to do this podcast. I did a similar podcast before COVID, or right when COVID hit, like in April 2020, sharing my story, and I wanted to do it again today because just feel people are kind of down; losing confidence in the economy, just waiting for the next shoe to drop, whether it’s inflation, greater inflation, or job loss. And I just want to put a stop sign and say, hey, believe in yourself. If you have a great business idea, don’t let the economy stop you. Go for it. Plan, right? You may fail, but plan. Run your projections. Make sure you can make enough in your business. Make sure you know what you’re doing. Try to get into an industry you have knowledge of and work your butt off, okay? But, with a little luck, when times get better, you have built a nice business foundation, and then bang, things are going to really boom for you as the economy opens up and more opportunities present themselves. You now have your business with solid foundation, solid bones, and now you can really build on top of that and you’ll take it to the next step.

So, that’s today’s podcast. I really appreciate you guys listening. If you’re watching on YouTube, thank you. And I really believe in the stuff and; talk to lots of, like, would-be entrepreneurs, and failure is okay, right? I learned from my failure. That’s fine, but don’t let a macroeconomic environment stop you. It’s one thing if you want to go into an industry that’s dying, okay, I got you. But if you believe in what you’re doing and you know you can do it and you’re just scared because the economy; don’t be scared. You’ll work twice as hard. You will push and push and push, but, don’t give up. Don’t prevent yourself from, at least, getting up to a plate and swinging. You can’t hit the ball if you don’t swing. So. You got three strikes. Go after it. And there will be great opportunities in this economy once things level off and we have that landing; opportunities will present themselves and if you built your business and started it, you’ll be able to prosper, I hope.

So. Again, I hope at least if you were thinking of doing a business and maybe were scared to take that step, hopefully this podcast gave you the push and the confidence to go for it. So go for it! You can do it! Thank you again. Have a great day, and I’ll talk to everyone again next week. Cheers. Take care.