Retirees Finance New Careers With 401(k)'s

BOSTON ( TheStreet) -- Retirees, especially Baby Boomers used to the fast-paced life of their professions, are turning entrepreneurial and tapping into their 401(k)'s and IRAs to start new businesses, often doing so without penalties and taxes.

In the past, antsy retirees unaccustomed to endless daytime TV, golf and buffet lunches eventually rejoined the workforce. Today, a lurching economy has meant fewer jobs to choose from as well as increased competition that favors youth over experience.

Newly retired Americans are seeing their second act in the workforce as a necessity, as retirement plans were hacked in half by the stock-market crash while fixed-income investments hardly pay any interest. For retirees with nowhere else to turn for financing, some are using a tax-code loophole to cash out their 401(k) or IRA funds for seed money without incurring the 10% early-withdrawal penalty or a tax hit.

The process is known as Rollovers as Business Startups, a name the IRS, perhaps tellingly, refers to by the acronym ROBS. Len Fischer, founder and chief executive officer of retirement-plan designer BeneTrends, says his ROBS-related business has grown 40% a year during the past three years.

Retirees "sit there and stare at the money and say, 'I'm not making anything off it anyway, why not take a chance and try to do something special with it,' " says Ed Deicke, managing partner at Plainview, N.Y.-based North Shore Wealth Management, a JHS Capital Advisors Company.

Traditional sources of financing a new business are bank loans and tapping into home equity. Banks, however, have tightened credit lines since the recession that began in late 2007 and the TARP bailouts that followed. Small-business lending has dropped by $40 billion to $670 billion in the past two years. Meanwhile, plummeting real-estate values, both commercial and residential, have devalued the collateral used to secure equity-based loans.

ROBS begin with a potential business owner creating a C-corporation and establishing a retirement plan for its employees. The owner's previous 401(k) or IRA funds are then rolled over into the new plan, which has been constructed as a qualified profit-sharing plan. The plan document provides that all participants can invest the entirety of their account balances in "employer stock."

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