How to Use Retirement Funds to Start a Business
NEW YORK ( MainStreet) -- With access to credit still tough, small-business owners sometimes need alternative sources to fund a business.
Rolling over a qualified retirement plan is a good way to inject equity into your business without penalty, says Steve Stovall, vice president of business development at Benetrends, which helps entrepreneurs and small-business owners create funding strategies for their businesses.
|With access to credit still tough, rolling over a qualified retirement plan is a good way to inject equity into your business without penalty.|
"While the Small Business Administration says there are all types of loans available, to actually find a bank that will fund a lot of business opportunities is very different, and those actual lenders can be very few and far between. So if somebody is up against a time constraint or if someone doesn't a have a job, without creating debt or without pledging collateral activity, using the 401(k) rollover is a great way to go," Stovall says.
How exactly does it work?Stovall: We create a C corp. on your behalf. We have your C corp. sponsor a qualified retirement plan. Your original retirement plan will transfer or roll over money to the new retirement plan, and that happens without tax or penalty. The new retirement plan then buys stock in the new corporation and the corporation will then have cash to acquire assets, whether they are goods or services, and the corporation uses that money as operating capital. The only plans that are out of bounds are Roth IRAs or sometimes pension plans, but pretty much as long as there is a retirement plan that is composed of pretax dollars and allows for a lump-sum distribution of funds, those plans are fair game. The IRS will not allow the Roth program rollover for a business start-up
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