Funding a New Business Venture with Retirement Money

What do I need to know about using my retirement funds?

There are ways to use IRA and 401(k) funds to finance your start-up business.

But it’s not as easy as just withdrawing the money and spending the money however you want “for the business.”

There are significant legal steps.

The key is rolling over the money into a corporate retirement account that allows you to invest in the business.

Where is the best place to withdraw the money?

It depends on a range of factors like your portfolio diversification, your retirement goals, your age and your employment status.

If you’re currently employed, you could take a loan from your 401(k). But keep in mind that the loan usually must be repaid before you terminate employment.

If you have a Roth IRA, you can take tax-free and penalty-free withdrawals of all contributions to the account that are at least 5 years old. The downside is, you can’t replace the money after it’s withdrawn.

What does the IRS say?

Another option you might have read about is called the Rollovers as Business Start-Ups (ROBS).

However, if this transaction is not performed to the letter of the law, you can be subject to big IRS penalties.

“ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction.”

We want to make sure that you achieve your retirement goals. And if that includes starting a new business, we want you to enjoy it! However, there are many caveats to using retirement funds as the initial capital injection. It’s important to get it right.

Speak with a Morgan & Associates CPA today for expertly tailored advice that’s exclusive to your tax situation.