Did you know that you could Tap your 401(k) for Business Funding Purposes?
People who are laid off and who have spent months facing rejection in interview after interview finally get sick of it at some point. It’s bound to happen. It occurs to them that creating a job for themselves – their own business – could be a great idea when no one in the job market actually wants them. Just one little problem – business funding. One doesn’t even know how to work up the courage to walk up to a bank and ask for a loan. And then it occurs to them that they do have business funding right there in their back pockets – it’s their 401(k).
All it’s ever doing is evaporating with the stock market anyway. Would be a good idea to tap into it to really put it to work for you?
If you do it the right way, if you follow what it says the tax code about situations like this, you actually could use your 401(k) to secure your future in business. And you could do so without a penalty. For some people, it really can work.
Okay this is going to sound a little complex. The first thing you need to do is to establish a C Corporation (that’s just a fancy term for a small business that gets itself incorporated as a company with shareholders who are not liable for anything beyond their investment in the company). Once you’ve done that, you need to create but not issue stock. After that, you have to have your corporation adopt your 401(k) plan. And then you set up a profit sharing plan that allows all the assets coming in from rollovers to be plowed back into the employer stock. You’ll probably need a tax attorney to help you make any sense of all of this. They will probably charge you $5000 or so set it for you.
The tax code requires that you invest only in a going concern. It has to be a business that’s already in the process of buying and selling something. In a way, the franchise business model happens to be the best for this kind of thing. Business funding done using a 401(k) absolutely has to pay close attention to all the IRS rules. Since your business is now a corporation, there are dividends that have to be paid. If you are paying yourself a handsome salary and just pennies in dividends, the IRS is not going to accept that. It would be a good idea to not take your salary out of what comes out of investing your retirement funds at all. Taking your salary out of your operating revenues makes more sense.
Typically, people with at least $200,000 in their 401(k)’s are the ones who actually do well with these plans. Since it’s your retirement, you need to make sure that you really have experience running a business before you plunge in.