The idea of doing more with your retirement funds than just stocks or bonds is slowly but steadily gaining popularity. For those with a proactive approach, the thought of using an IRA or 401(k) to fund a business holds a lot of appeal. It avoids the volatility of the stock market, while at the same time letting an investor get hands-on with his/her investment success. However, there are some things that you must know before starting a business with retirement funds.
It’s exciting to launch a new business as it gives you the opportunity to start fresh with the promise of great things yet to come. However, you have to go in with your eyes wide open. Before you use retirement funds to start a business, it’s essential to have an exceedingly clear grasp as to the workings of that business. The product or service you wish to sell may be a passion, but the business end of that passion might be a very different reality. Start-up costs are often prohibitive, and could require funding sources beyond your retirement funds. Additionally, making a legal business means truly making it legal. Depending on your area of commerce, you might need additional certifications, registrations, documentation, or local governmental approval.
This is a consideration which is specific to businesses being capitalized by retirement funds. Any retirement investment is bound by a law called Prohibited Transactions. In short this means that the retirement account holder may neither give nor receive direct benefit from the retirement funds. (Obviously, when the account holder take distributions, the law doesn’t pertain.) Prohibited Transactions pertain to businesses in a big way. If your retirement fund owns the business, you may neither receive a salary from the business, nor do any direct labor for the business. (General management, however, is perfect acceptable.) For those interested, there is a workaround with a 401(k) variation known as ROBS (Roll Over Business Startup). However, this plan is fairly expensive and requires a lot of paperwork. Whether or not it makes sense depends on your need to physically work in the business and whether its economic model can handle the fee structure.
Standard retirement plans won’t give you the flexibility you need to start a business. The standard brokerages and custodians are geared purely for market products and don’t want to be involved in the intricacies of private business. That means that you’ll be looking to open a self-directed retirement plan. However, even in the self-directed realm there are a number of choices. The one most appropriate for private business is the Checkbook Control model. This gives you the flexibility you need to make capital improvements, purchase product, and pay for services without constantly being dinged with fees.
These are some of the highlights to keep in mind when planning a business with retirement funds. The best thing to do, though, is to get fully educated. Research what you can, and then place a call to one of our Specialists to ask whatever questions you still have. Then you’ll be able to make a solid decision as to whether your new business will be viable with retirement fund backing.
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