Top Questions from Entrepreneurs Part Four: Can I Use My 401(k) to Start a Business?

Post Date: August 29, 2017

Entrepreneurs have options when it comes to financing their small business dreams.

Bank loans, grants, and help from family members are all options, but may not do the full job when it comes to providing needed startup funding.

As seen in the article, Top 20 Web Resources for Business Newbies, there are multiple resources that can provide guidance and recommendations, including the use of existing retirement savings as a funding source. This article explores how this option works. 

How Does Using 401(k) Funding for Startups Work? 

The Rollovers as Business Startups (ROBS) plan lets you use existing qualified retirement account funds, such as a 401(k), 403(b) or IRA, to fund your business without accruing taxes, debt, or penalties. 

What Steps Do I Need to Take? 

Using retirement funds for your startup involves four key steps. When working with an established, experienced partner, you can be sure each step is done correctly, and you have your funds quickly.

Step 1: Establish a C Corporation. Your new business needs to be established as a C Corporation, which has tax advantages that allow for the use of retirement funds with the right legal structure.  Read “The Ups and Downs of Using a C Corporation”

Step 2: Create a New Retirement Plan. You need to establish a new qualified retirement plan in the new corporation to avoid withdrawal penalties and maintain a tax-deferred status. A Benetrends retirement plan expert will work you to understand your long- and short-term goals and structure the retirement plan accordingly. 

Step 3: Transfer Retirement Funds. After the new plan is designed, a plan custodian is designated. The custodian creates the new retirement account and helps with the rollover of funds from your existing retirement account. 

Step 4: Launch the New Business. Once your retirement funds are in place in the new account, they can be invested into stock in your new company. If you designate an investment in the company from among the plan’s holdings, the plan buys stock, giving you the capital required to buy or start running your company.

What Are the Major Advantages? 

Using retirement funds for startup costs has several major advantages, including:

  • Tax Benefits. Under the ROBS plan, you maintain tax-deferred status and do not face any early withdrawal penalties. 
  • Flexibility. The funds can be used for many different purposes. The money can be used against cash requirements for a Small Business Administration loan, to pay franchise fees, build or renovate a site, or buy equipment. You can even use the funds to pay yourself a salary. You do not need to use all the funds your transferred, either. 
  • Ease and Speed. In some cases, you can get access to your funds in as little as 10 business days. Accessing your funds does not depend on your credit score or having a completed business plan. 
  • Peace of Mind. Using your retirement plans means you are not incurring additional personal debt or having to negotiate with lenders for needed funding.

At Benetrends, we help entrepreneurs make their dreams a reality. Our Rainmaker Plan provides you with the guidance and plan administration support to make sure you can focus on your business. We will ensure compliance with tax regulations and that the new retirement plans continue to work for you and your business. To learn more, download The Definitive Guide To 401(k)/ROBS Business Funding today.

Categories: Blog

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