Many entrepreneurs are shocked to learn that the IRS allows you to use your former employer 401(k) funds or even your IRA funds to buy or start a business. Individuals can also use their 401k funds to invest their current businesses. This article will explore how you can use your 401k to fund or invest in a business with ROBS 401(k). The ROBS 401(k) structure will allow you to start or fund a business you can run, manage and even earn a salary from. If you are leaving your job or plan to leave your job and have a qualified 401(k) retirement plan, then the Rollover Business Start-Up Solution (ROBS) will likely be the most tax advantageous solution for you.
Can I Use 401(k) Funds to Start a Business?
This may come as a shock to some 401(k) plan participants, but a plan participant is not permitted to rollover current employer 401(k) funds to an IRA or another 401(k) plan unless there is a plan triggering event. The plan triggering rules essentially restrict a plan participant from rolling over 401(k) plan funds to another retirement plan or take a distribution, except for certain hardship exceptions, until they reach the age of 591⁄2, their job is terminated, or the plan is terminated. Hence, unless a plan participant can satisfy one of the plan triggering rules or specific exception, such as a hardship, he or she will likely not be able to use their 401(k) to start a business.
Read More: ROBS Solution for Entrepreneurs
The ROBS solution is basically the only way one can use retirement funds to invest in a business they will personally be involved in. Although a Self-Directed IRA allows one to make passive investments with retirement funds, it does not permit one to use IRA funds to invest in any business that the IRA holder or any disqualified person will personally be involved in, directly or indirectly. In other words, if one wants to use former employer 401(k) funds or IRA funds to buy or start a business that they or a family member (lineal descendant) will be personally involved in, the ROBS solution is essentially the only way to do it
Learn More: What is the Rollover as Business Startup Solution?
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How to Use Your 401(k) Funds to Start a Business
The ROBS solution typically involves the following sequential steps:
1. A new or existing C Corporation is set-up or used. IRA Financial can assist with the set-up of the C Corporation.
2. The C Corporation adopts a prototype 401(k) plan from IRA Financial that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”
3. The retirement account holder directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan. Note Roth IRA funds cannot be rolled into a 401(k) plan.
4. The 401(k)-plan trustee then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that the entrepreneur wishes to invest in the new business).
5. The C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.
Related: Top Businesses Using Rollover Businesses as Startups
Common Questions About Using Your 401k to Start a Business
Read More: 401k Business Financing | Rollover as Business Startup | ROBS 401k | Frequently Asked Questions – IRA Financial Group
IRA Financial Rollover Business Startup Solution
IRA Financial literally wrote the book on the ROBS Solution. Our founder, Adam Bergman, published the first book on the ROBS solution titled, “Turning Retirement Funds Into Start-Up Dreams”
IRA Financial has helped thousands of entrepreneurs and small business owners over the years use their retirement funds to start the business of their dreams or help build their existing business. The ROBS solution is the most tax advantageous way to use retirement funds in a tax and penalty free manner to start or fund a business. With the ROBS solution, you will not have to pay tax or even a 10% early distribution penalty on any IRA or 401(k) plan distribution. For example, if one is under the age of 591⁄2 and in the 25% income tax bracket, taking a taxable distribution of $100,000, would leave the individual with approximately $65,000, not including any state income tax. Whereas the ROBS solution would allow the individual to rollover the full $100,000 to start or fund a business without any tax or penalty.
Related: Rollover as Business Startup Compliancy Rules
You can learn more about the ROBS solution by downloading the free IRA Financial Rollover for Business Startups info kit.