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With
help, you can use your 401(k), 403 (b), IRA rollover or
other retirement plan as capital to purchase a business
while not triggering a tax penalty. These transactions are
within the letter of the law as spelled out in the Employee
Retirement Income Security Act of 1974 (ERISA). The
IRS has issued determination letters validating many of
these plans.
If you
just cash out your retirement account early, the premature
distributions are penalized and taxed as ordinary
income—resulting in a typical net of about only 50¢ on a $1.
However, certain provisions of ERISA do provide a way to
legally move money locked in 401(k) or other IRA rollover
accounts directly into a new or established business without
distributions, taxes, penalties or the use of loans.
To
set-up this plan does require outside help. There are
several companies that provide this service. Generally
you can expect the set-up cost to be in the range of $4,000
to $5,000 with an annual maintenance fee of $800 to $1,000.
Obviously, the size of your 401k needs to be large enough
that these fees are not exorbitant as a percentage of the
funds being used.
There
are numerous firms that offer this service. Two of the
largest are BeneTrends Inc. and Guidant Financial Group (we
have no affiliation with either). We always suggest you look
at several providers before committing to one. Their
websites provide more detail on this subject:
http://www.guidantfinancial.com/products/small-business-financing/default.aspx
http://www.benetrends.com
Of
course, just because you can use your 401k as the source of
funds, does not mean that is the best way to finance a
business acquisition. Consider all your options
(available liquid assets, bank/SBA financing, home equity)
before committing to use your retirement account.
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