Financing Start-Up Dreams With Retirement Savings

You can use 401(k) money to create a new business, but beware: the rules are complicated and the Internal Revenue Service will be watching closely.

Comments: 23

  1. I think this would have negative estate planning consequences as well.

    Suppose I put $100,000 into a startup company. Assume that 10 years later, when I pass on, the company is worth $1,000,000. My heirs take that stock with a $1,000,000 tax basis. And unless I have more than $4,000,000 in other assets when I die, there is no estate tax. My heirs, with careful planning could sell the business for $1,000,000 and pay no income tax on the sale. Any gain they do realize when they sell the inherited shares qualifies for long-term capital gain treatment, currently taxed at the federal level at no more than 20%

    But if those shares were held in an IRA, there would be no basis step-up when I pass. They would inherit those shares inside the IRA with a built-in taxable gain of $900,000. What's more, since the gain would be inside the IRA, if the shares were sold, that gain, when it is paid out to the heirs, would be ordinary income, taxed at 39.6%.

  2. Please let Scott Hanson of Hanson McClain understand that a S corp can only write off loses against basis in the S Corporation. If there is NO Basis then losses will generate income when the S Corporation is Closed or Sold.

  3. Easy to invest money in an IRA or 401k, which benefits large businesses.
    Difficult to invest the same money into your own small business.
    Another tax law contributing to inequity in this country.

  4. Using your retirement nest egg for non-retirement purchases is a bad idea. It is especially a bad idea the closer you get to retirement because you will probably not be able to replace those valuable funds. The only valid reason to withdraw from a retirement account before retirement is in case of a true emergency when there is absolutely no other way to get the money. There are many sites that offer retirement information about things like this. I recently found the site Retirement And Good Living that provides great information on finance, health, retirement locations and more. I never understand why more people do not use sites like this. In most cases the information is free.

  5. Agreed. This sounds very like the ESOP schemes that invested your entire pension in the stock of the company you worked for. If the company went bust, you lost your job AND your pension. (I was the "victim" of one of these arrangements when I was 25 - happily too young for it to be anything more than a salutary lesson).

    The whole point of government-incentivized retirement savings is to ensure that people have a nest-egg that's independent of their ability to work. Surely these schemes are very bad public policy.

  6. "ROBS" sounds about right.

  7. "Here’s how ROBS work: People take their 401(k) account (or other qualified retirement plan) and roll it over into a new plan that buys shares in an operating company that will own their business."

    Using retirement money to fund a start-up is harder than it has to be. According to the definition above, the first problem is starting out with money but rolling it into shares of a new company that will own your business. Why can't you just cash in your shares, take your money, put it in a Business Account and then open your business? There could be a rule that if you use the money to start a business, you have, say, 6 months to a year to complete the process without penalty.

    Using your retirement money to start your own business really doesn't need to be so difficult.

  8. There is an easier route in fact, which is also mentioned in the article: take the money out and pay your taxes on it. Which is only fair given that the tax benefits (quite relevant and costly to taxpayers) were meant to encourage saving for retirements, and not for other uses.

  9. Bet Mitt Romney wouldn't even be looked at by the IRS. Two sets of rules....

  10. When it comes to tapping my 401-(k) funds for whatever need, I remember the Simon and Garfunkel lyric, "When she goes, she's gone."

  11. I don't get it. Most small businesses fail. Most! What ya gonna do when you've used up all or most of your retirement savings and you still can't get a job? Why would anyone counsel someone else to do such a crazy thing?

  12. Beer should be illegal. It makes people risk their retirement income. The only risk-free way to start a business would be for the government to pay its bills. Personally, I don’t have the energy to work for a living. The best business plan is to assume you won’t be able to ever make a profit. New things I’ve seen happen in my lifetime: electric and water meters, with privatization of the electric company; privatization of the phone company, and then more than one phone company, so now I can’t call information to find out my sister’s phone number; 401(k)s, as if you could save money on minimum wage. All those changes are the result of irresponsible congresses. The government should think of the public as in their care.

  13. It is inevitable that some start-ups will fail within the first 5 years. Then what will happen to these people who have no retirement funds, no business and will likely be viewed as "too old" to be hired again?

  14. The article mentioned a couple of successful entrepreneurs. Truth be told, most people coming out of a (long time) corporate environment do not make good entrepreneurs. They just aren't willing to work as hard as is necessary when starting your own business. Not to mention that most businesses start out undercapitalized--a sure recipe for disaster. And this is why so many fail. Using retirement income on so risky a venture? Bad decision.

  15. why does the tax code have to be so f'ing complicated? it so complex that ingrained into the minutia of every decision that people make it can only be described as oppressive. it's a real problem.

  16. I just completed a franchise purchase using ROBS, and I beg to differ with commenters that make sweeping assumptions proving they don't know what they are talking about!

    Y'all are askin' why I would "risk" my retirement? I need a steady flow of income NOW...retirement will be the unfortunate consequence of living too long. By my calculations, between the income tax due and the 10% penalty, each dollar withdrawn from the 401(k) costs about $1.50. Paying Guidant $5000 for set up and another $1,500 or so per year to administer it, is going to cost me about $1.10 for each dollar I withdraw...and I end up with a small business.

    My expectation is the business will generate sufficient income to keep me afloat while maybe letting me pay some back to the retirement accounts, and the monthly "interest" is considerably lower than if I had to borrow from the SBA.

    Regarding the fellow who's example is the business that grows 10-fold in ten years...I should have such problems! Right now, I have more pressing concerns for which ROBS is a very cost effective way to put my assets to work.

    Meanwhile, the IRS hasn't said anything about this since 2008, and every such plan that has been audited since the clarifying letter of 2008 has been approved. Now imagine that tomorrow they say they have changed their minds, and the several tens of thousands of good folk starting small businesses and working hard to achieve the American dream are suddenly squashed? Bad optics, even for the IRS.

  17. when every decision is complicated and requires legal/regulatory review, and you endanger your ability to survive in retirement, this seems a very foolish way to start a business. just the regulatory costs could sink the efforts...

    http://www.integratedfinancialny.com

  18. "Wouldn't it be great if you could leave all your money worries and job stress behind?
    Well, you can. And you don't have to move into a cave to live a freer, happier, healthier life -- or choose between your work, your pleasures, your friends, and your family.
    All it really takes is the right investment portfolio. A portfolio not just of stocks and bonds, but one that includes key investments that you make in yourself and in your family. Like any good portfolio, the best investments you can make in yourself are diversified, carefully managed, and geared to the long term.
    .... to create the portfolio that's right for you, you've got to invest time and energy in figuring out what you really want -- and what will get you there." By Marc Eisenson

    ROBS is a "no brainer", a perfect storm of unemployment, too young to retire and too old to get a job (undervalued in the workplace), No lender willing to lend you capital to start a business but a you have a strong desire to create your future by investing in oneself. If you're baby boomer who has some retirement but not enough to keep the wolf from your door when you retire you better get started on creating your future and this is the perfect instrument to do it with. If you don't believe in yourself who else will. Use your money instead of letting Wall Street use your money to profit.

  19. "The greatest gift you have been given is the gift of your imagination. Everything that now exists was once imagined. And everything that will ever exist must first be imagined"~Dr. Wayne Dyer

    Live from spirit and have faith in yourself, remain focused and positive and live for today.

  20. Finding the appropriate loan for your company's startup costs or expansion can be a difficult task. It is paramount to have a plan laid out for ROI. Also, it is important to note that most people do not qualify for traditional bank loans. For this reason, owners need to search for alternative business financing which will result in a shorter term and higher payback.

    When starting http://smallbusinessfunding.com, we wanted to provide all possible options to business owners who wanted grow an existing business. There are several ways to get non-traditional funding for your business including the 401K options as mentioned in the article. If you don't have the option to borrow against your retirement, there are revenue based loans as well as those backed by your assets.

    Choosing the best possible payback term, fee, and loan can be a difficult task, especially if you don't already have an existing lending relationship or credit score over 700. However, there are several companies like mine if you search for small business funding that can help you find the right loan product for your business with the lowest risk. No one wants to see their business fail or lose retirement funds. There is help out there if you do your homework and ask questions.

  21. Although your company's mission is laudable, it should offer the services it promises. From personal experience and a handful of other start-up businesses that I know applied, there seems to be a selective criteria for qualification. However, the parameters that define the criteria are not transparent to say the least.

  22. Contrary to the statements in this article, the recent United States Tax Court decision in Peek v. Commissioner (holding that the owner of a self-directed IRA is prohibited from personally guaranteeing a loan by a company owned in part by an IRA) should not apply to a ROBS transaction for very good legal and policy reasons. For a detailed discussion of these reasons, please Google the June 11, 2013 article from the tax department of the prominent law firm Latham & Watkins. For more information about ROBS transactions generally, please check out MySolo401k.net's FAQ page:

    http://www.mysolo401k.net/401k-business-funding-FAQs.html

  23. Let's not forget about those C Corporation income tax rates, which would be completely avoided if your business were set up as an S Corp or LLC. ROBS...such a great idea for Guidant, such a bad idea for their clients.