Using Retirement money for business fund

Can the Retirement Fund Provide Alternative Business Financing? As an entrepreneur, your retirement fund offers a variety of business financing options you can use to acquire or expand an enterprise.

last updated Monday, May 15, 2023
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John Burson     Subscribe
Using Retirement money for business fund


As an aspiring entrepreneur, you struggle with capital financing for your ideas. After collecting savings, accepting help from friends, and taking out business loans from traditional banks and hard money lenders, you will likely run out of options.

The good news is that there are several ways to use your retirement fund for business financing, such as:

Accept a Taxable Distribution

You can access funds in an Individual Retirement Account (IRA) with a regular income tax and a 10 percent penalty for early distribution if you are under 59½. You can receive tax-free funds if you are over 59½ and have a Roth IRA open for at least five years.

Consider the 401(k)

Different 401(k) retirement plans offer a loan feature, where you can borrow $50,000 or less than 50 percent of your plan value. You must repay the loan in five years, at least in quarterly installments, at an interest of at least prime. The advantage is you can enjoy the feature tax-free, even though you can only access a limited amount of money.

The Rollover Business Startup Solution (ROBS)

ROBS allows you to roll over your retirement funds for business financing. Using the ROBS option, you can easily roll over a 401(k) plan or IRA pre-tax into a new 401(k) plan under a corporation. After that, you can buy the share from the corporation, qualifying you to appear on the business' employee register with a reasonable income. The advantage is you can use all your IRA or 401(k) funds without incurring a tax or penalty. However, the highly controversial option also opens you and your business to an IRS audit, as they often evaluate ROBS agreements for abuse of set tax rules and regulations.

A Self-Directed IRA

Initially, using a Self-Directed IRA LLC to acquire stocks in a corporation may look similar to the ROBS structure. In both options, you use your retirement funds to buy a business. However, after analyzing a recent U.S. Tax Court Case, Ellis v. Comm'r of Internal Revenue, you understand better the limitations and risks of a Self-Directed IRA in purchasing businesses. In the case above, Ellis invested IRA funds in a corporation and eventually acquired business assets, which limited his ability to guarantee a loan or take a salary, which triggered an IRS prohibition on the transaction rule violation.

Several legal provisions make using your retirement funds for business financing possible. However, you must prepare to navigate complex systems and tax obstacles. Depending on your options, always go for the non-retirement funds first and only go to the retirement fund option as a last resort. If using your retirement fund is your only option, consider the decision and consult extensively with tax and financial experts to help you settle on the least expensive choice.

Also, do not approach the business with unrealistic optimism. SBA statistics indicate that 8 out of every ten startups fail in the first three years. Ultimately, using your retirement funds is a huge risk that could destabilize you or leave you financially unstable for the rest of your life. Consider building your business for at least three years, and only refer to the retirement fund when you are confident that you are running a steady ship. You are assured of regular revenue from your business.


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