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Use of Retirement Funds to Purchase a Business
The need to access
retirement funds for the purpose of acquiring a business is growing.
It is common to find people whose liquidity is located primarily in
qualified vehicles such as 401(k) rollover accounts. As people
are being downsized from Corporate America, they find themselves at
a crossroad; they can either take the entrepreneurial road or
find another job. Many people are deciding to take control of
their own destiny by starting or buying a business. Thus comes
the problem. Many of these people have been building
retirement accounts, often, with much of their money in qualified
retirement vehicles. If improperly accessed, they stand to be
hit with a 10% penalty and often pay 20% or more in federal income
tax. Depending on tax bracket and the state of residence,
total federal and state taxes can approach 40%. The idea of
losing from 30% to 50% on a distribution from a qualified account
does not sit well with most people. So, the question to be
answered is, “How can a person access their retirement funds to
purchase a business without paying a penalty or income tax?”
There
are three primary ways to gain
access to retirement “qualified” funds for use in a business
acquisition WITHOUT incurring penalties and taxes.
1) Self-Directed
IRA
This
option essentially allows for an unlimited investment in a business
but there are limitations on how much ownership the person directing
the investment can have in the business.
2) 401(k)
Fund with a borrowing provision
This
is the most limiting because the IRS Code has maximum amounts which
can be borrowed from the fund. This can be a beneficial option
when smaller sums are needed.
3) Retirement
Program designed to allow for Small Business Investment
This
option has unlimited potential. There are essentially no
limits on ownership or the amounts which can be used. If
integrated into an operating structure properly designed for the
specific needs of a business owner, this is an excellent way for a
person to acquire a business.
A key
consideration when using qualified funds for a business purchase is
to maintain compliance with all ERISA (Employee Retirement Income
Security Act of 1974) and IRS Regulations. It is extremely
important to seek the guidance of Transaction Advisory Professionals
experienced in the use of qualified funds for the purpose of
acquiring a business. |
