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Fund Your Business with an Individual 401K | Top 10 Tips

Fund Your Business with an Individual 401K | Top 10 Tips

Fund Your Business with an Individual 401K

Starting a business can be both exciting and stressful, especially when gathering up the funds to get it off the ground. Any big venture costs money, and while it may be difficult to get a loan outright, there are other options available, especially if you have contributed to a 401K plan. Whether you have a retirement plan through your current position or an Individual 401K, it is possible to use your account to fund your new business plan.

While funding your business with an individual 401K seems ideal, it’s up to you to perform your due diligence to build a solid venture while protecting your nest egg. Here are some helpful tips to consider should you choose to use your retirement fund to start a small business.

1. Get to Know Legal Framework

Before jumping into a business deal using your individual 401K, the best plan of action is to research what the government will legally allow you to do with your funds. Starting a business isn’t as easy as writing yourself a check from your retirement fund. The IRS has many legal procedures and rules in place to prevent abuse of the system. Certain payments and transactions are scrutinized by the IRS and it could be easy to have a legal issue arise without the proper knowledge.

While this may seem daunting, there are proper ways to set-up your business using your solo 401k. It’s a matter of reaching out to the proper channels and getting to know the legal terminology.

Fund Your Business with an Individual 401K | Top 10 Tips2. Discover ROBS and C Corps

While getting to know the framework, there are many terms to get to know. Two in particular are ROBS and C Corporations.  Rollover as Business Startups or ROBS are arrangements where business owners or would-be owners use their retirement funds to pay for various business costs from startup fees to expansions. In order to use your funds without being hit by a tax penalty, you need to roll them over.

One of the first steps toward using your retirement account to fund your new business is to establish a C corporation. A 401K can be structured to meet the needs acquired to properly roll your assets from an old fund into the new IRA. Whether you choose to form this account alone or with a partner, this allows you to use your 401K like a financial institution to fund your sought-after venture. Now comes the small matter of deciding how to build your future.

3. Choose the Right Business Investment

While you can start almost any type of business using your solo 401k, it’s important to choose something that isn’t a hobby. It should be an active venture, not something that is solely focused in selling or lending, otherwise it wouldn’t qualify as a “business” by the IRS. You can use your funds to buy a franchise, begin a small venture, or form a start-up.

Consider where you are, what is marketable, and what would benefit you in the long-term. The most obvious risks are that many businesses do not last. Even long-held business moguls are collapsing after years of success, so be sure to invest in an idea that can grow over time and work in your location.

4. The 401K Becomes the Shareholder

Using your individual 401K is like taking out a loan without the credit check. You have the added benefit of overseeing your own money when making business decisions. This could be beneficial when it comes to covering business expenses or grow your venture; however, overextending could hurt your fund. Be cognizant on where you are spending your money, and on who. 

With your new 401K, you will need either a tax attorney or a CPA handling your account to be sure that everything is setup properly. This fund isn’t just your bank; it is your future. Take steps in order to ensure that everything is in order.

5. Put a Business Plan in Place

It’s not enough to be very passionate about a business opportunity. Without the proper planning, overspending and poor decision-making can deplete your retirement fund quickly. Your venture is digging directly into your retirement savings, and if you are investing more in your own pocket then running your business, the IRS will take note of it. It would be beneficial to map out a business plan over the first few years. How will you handle employees, rent space, handle clients, or keep up stock? Is this business going to provide goods you need to constantly replenish, or will it be more like service? These questions, along with many others, should be answered when considering your investment options.

Free Gift6. Tax Benefits

Depending on your retirement fund type, you can avoid immediate taxation on your funds. By using your 401K, you can avoid the initial tax hit by utilizing the rollover. This money will be moved over tax and penalty-free from your previous account. It allows you to take control of your funds tax-free. However, this money has to be repaid to your account. Remember, you are taking it out as a loan.

7. Invest & Treat Your Business Like an Asset

Much like investing in real estate, stocks, or precious metals, when starting a business venture, you are creating your retirement asset. It’s important to put stock in your business to get the maximum benefit. While a failing business can deplete your retirement fund, a successful one can provide a hearty nest egg. Building a sturdy venture can provide steady income for your account, if everything is running smoothly.

8. Provide Perks for Employees

As your business grows, it’s important to keep your employees happy. Setting up a retirement plan helps entice and keep good employees and can secure your future. As the employer, the business can receive tax benefits depending on the plan. Simple IRAs, SEP IRAs or Self-employed 401K plans can serve as an incentive to attract and keep workers looking to plan for their own retirement. While it may not be achievable at the start, it is something to consider as your business becomes more established.

9. All Funds are Focused Through Your 401K

Do not feel pressured to invest your entire retirement account into your budding business in one fell swoop. The benefit of an individual 401K is deciding where and when you can utilize your money. While you might use a good portion as a loan for your business, you don’t need to place all of your eggs into one basket. As your business grows, you can purchase more shares. With control over your fund, you decide on the investment options.

10. Perform Your Due Diligence: Retirement at Risk

When starting a new business using your retirement savings, keep in mind that you are putting your future at risk. Perform your due diligence as you prepare for your business plan. Reach out to custodians who are well-versed in how to properly distribute your solo 401K plan. Consider the contribution limits and the business expenses you may face at the start of your venture, and how much you plan to contribute.

With a proper plan in place, it’s possible for you to not only be successful, but for you to build your retirement savings for a comfortable future.

If you are prepared, the risk may be worth investing in. With the proper steps, a solid business plan, and the proper funding, it is possible to have a successful and beneficial business venture. Be sure to invest in your future and secure your retirement plan for your golden years.

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