Use of Retirement Funds

Use of Retirement Funds to Purchase a Business

The need to access retirement funds for the purpose of acquiring a business is growing.   It is common to find people whose liquidity is located primarily in qualified vehicles such as 401(k) rollover accounts.  As people are being downsized from Corporate America, they find themselves at a crossroad;  they can either take the entrepreneurial road or find another job.  Many people are deciding to take control of their own destiny by starting or buying a business.  Thus comes the problem.  Many of these people have been building retirement accounts, often, with much of their money in qualified retirement vehicles.  If improperly accessed, they stand to be hit with a 10% penalty and often pay 20% or more in federal income tax.  Depending on tax bracket and the state of residence, total federal and state taxes can approach 40%.  The idea of losing from 30% to 50% on a distribution from a qualified account does not sit well with most people.  So, the question to be answered is, “How can a person access their retirement funds to purchase a business without paying a penalty or income tax?”

There are three primary ways to gain access to retirement “qualified” funds for use in a business acquisition WITHOUT incurring penalties and taxes.

1)      Self-Directed IRA

This option essentially allows for an unlimited investment in a business but there are limitations on how much ownership the person directing the investment can have in the business.

2)      401(k) Fund with a borrowing provision

This is the most limiting because the IRS Code has maximum amounts which can be borrowed from the fund.  This can be a beneficial option when smaller sums are needed.

3)      Retirement Program designed to allow for Small Business Investment

This option has unlimited potential.  There are essentially no limits on ownership or the amounts which can be used.  If integrated into an operating structure properly designed for the specific needs of a business owner, this is an excellent way for a person to acquire a business.

A key consideration when using qualified funds for a business purchase is to maintain compliance with all ERISA (Employee Retirement Income Security Act of 1974) and IRS Regulations.  It is extremely important to seek the guidance of Transaction Advisory Professionals experienced in the use of qualified funds for the purpose of acquiring a business.