How to Use your 401(k) to start a business
Business owners retirement savings ACCOUNT (borsa)
Although not obvious to many, even knowledgeable observers, pension, profit sharing, 401(k), 403(b), other retirement plan and rollover IRA money may be used to fund your own franchise, business start-up or business property. This can be done without distributions, taxes, penalties, or the use of loans. It’s sort of a self-venture-capitalization. These transactions are within the clear letter of the law.
There are a plethora of rules separating future retirees from the funds held in trust today and awaiting them at retirement. Distributions are taxed as ordinary income—upwards of 50 percent. Early distributions, prior to age 59½, add a 10 percent penalty tax. The Employee Retirement Income Security Act of 1972 (ERISA) has an ironclad “anti-alienation clause,” this means that the future pension may not be used as collateral for a loan. If it is so pledged, it is deemed to be a distribution, therefore taxed. There is an exception for “participant loans,” but these are limited to less than 50 percent of the vested account balance or $50,000 and must be amortized over five years or less with quarterly interest and annual principal payments. Loans may not be rolled into or allowed in an IRA account.
CBI Team Fort Smith-River Valley has formed a strategic alliance with a company that has developed a way to legally move money locked in 401(k) or other IRA accounts directly into a new or established businesses without distributions, taxes, penalties or the use of loans. The money may be used for business acquisitions, franchises, property, equipment or working capital.