Using Your Retirement Savings To Start A Business


Some people decide to use their retirement savings to start their own business once they have retired. When retired people find themselves with a lot of time on their hands and a sizeable retirement account balance, it is no surprise that they would want to start their own business that they can run like they want and be their own boss. While there is no prohibition on using the funds in your retirement account to start a business, you must be careful to ensure that you do not lose your money and your business. Here are some things that you should keep in mind when considering using your retirement savings to start your own business.

The Process Is Complicated

The process of using your retirement savings to start your own business seems like it should be simple, but it is actually pretty complicated. One method used is converting traditional 401k accounts into new retirement plans, known as “rollovers as business start-ups” or ROBS. These new retirement plans can be used to invest in the retiree’s company without the retiree acquiring any debt. Because the process is considerably complicated, you will want to seek the assistance of a financial planner that specializes in helping people use 401k assets to invest in businesses or other nontraditional assets, like property.

Actions Must Satisfy Requirements of Federal Agencies

It is important to go through the process of using retirement funds to finance a business carefully to ensure that you do not break any of the rules or regulations issued by the Internal Revenue Service or the Department of Labor, which has jurisdiction over 401(k) plans. Making mistakes in the process could result in the loss of the person’s retirement savings, the business and a source of income. While some financial advisers see the plans as treading the line of legality, the I.R.S. will not bring charges against anyone that has followed the rules that have been put into place perfectly. Failure to do everything right could result in financial penalties, having the entire retirement plan disallowed and/or having to pay a large tax bill.

How Do ROBS Work?

Because ROBS have been steadily increasing in popularity over the past few years, many people are wondering how they work. People take their 401k account, or other qualified retirement plan, and roll it over into a new plan that purchases shares in an operating company that will own their business. A business that has been financed through ROBS has to be registered as a C-corporation, which can issue shares and does not prohibit ownership by trusts. The person does not own the company, the plan does. The person must also act in the best interest of the plan when making decisions for the company, so the person must do their research before making any major decisions.

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