Charlotte Business Professionals

By Dan Fragen of Ligero Group Franchise Consulrting

on July 16, 2009

Published in : Entrepreneurship

Keywords : IRA, 401(k), funding, start-up, small business financing,

RETIREMENT ACCOUNT FUNDING

What if you could use your own money to invest in your own business? Is betting a portion of your retirement account on yourself any more risky than the mutual fund you've been invested in for the past 5 years?

What makes this such a great funding option is the many additional benefits that come with using a retirement account to fund your business. For example:

• Done properly, you will "rollover" a portion of your current retirement account into the 401(k) program set up for your new business. Since it is a rollover and not a withdrawal or a loan, you pay no early withdrawal penalties and you don't have interest payments that impact your cash flow during the all important start-up phase of your business.
• Since it isn't a loan, you aren't signing personal guarantees that put assets like your home at risk.
• Since it isn't a home equity loan, you don't have interest payments and you aren't putting your home at risk.
• Once the funds have been rolled into your new company's 401(k) and the 401(k) has purchased stock in your company, those funds can be used for any expense associated with your business, including paying yourself a reasonable salary. This overcomes a big problem with start-ups, being able to pay your personal bills until the business becomes cash flow positive.
• You can shelter income from taxes by putting up to $200,000 per year plus another $200,000 if you are married into the company's 401(k).
• When it is time to sell the business, the 401(k) takes its share of the profits tax free, further funding your retirement account.

There is a very specific way this program must be set up and managed to pass IRS muster. If you are thinking about starting a new business, even if you have the available capital, it is worth the time to learn more about this program. 

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