How to Buy a Business Using Retirement Funds, and NOT Pay a Penalty Tax
You can use funds from qualified retirement accounts such as 401(k), 403(b), pension, profit sharing, and IRA rollovers to start or buy a business with no taxes, no penalties, no loan repayment and no hassle.
Will I pay tax or penalties if I use retirement funds to buy a business?
Not if you use qualified money correctly. Qualified money is money with a tax beneficial wrapper around it because it was accumulated in a tax-benefited plan.
Many people have been building retirement accounts with much of their money in qualified retirement vehicles like an IRA or 401k. If these accounts are improperly accessed (“unwrapped”), they stand to be hit with up to a 50% tax penalty in state and federal income taxes, depending on tax bracket and state of residence. 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?”
How to Use Retirement Funds to Buy a Business Without Penalty
- Use a Self-Directed Retirement Fund
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.
- Take a loan from a 401k with a borrowing provision
This is the most limiting because the IRS Code has maximum amounts which can be borrowed from the fund. Typically the max amount a 401k loan can offer is the lesser of 50% of the vested account balance, or $50,000, Although the 401(k) loan rules can change. If half of the vested 401k balance is less than $10,000, some plans allow up to $10,000 to be borrowed. This can be a beneficial option when smaller sums are needed.
- Set up a ROBS retirement account for penalty-free funds to buy a business
The Rollover for Business Startup allows using 401k investments to buy a business, Best of all, this option has unlimited potential. There are essentially no limits on ownership or the amounts which can be used. It is not a loan so no repayment is required and it’s not a distribution, so no tax or penalties need to be paid. 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.
Key Considerations When Using Qualified Retirement Funds for a Business Purchase
WONDERING HOW TO PUT YOUR RETIREMENT MONEY TO WORK?
Investing it in your own business lets your money work for you. Now that you know you can use cash from your 401(k) or IRA account to purchase a business without incurring early distribution penalties, with no taxes, no loan repayment, and no hassle, Let’s take a look at this example:
A Texas business buyer using $100,000 from a qualified retirement fund can keep the extra 31% that would have been paid in taxes, leaving an additional $31,000 to fund the new business by adopting a transfer trust plan versus withdrawing the funds outright.
With the adoption of a pension transfer trust, you are allowed to convert 401(k) and IRA funds into privately-held stock in your new business.
Talk to a Professional About Financing Options to Buy a Business
The following pension and tax advisors can provide all the specific components necessary to make sure the transaction is in compliance with all applicable IRS Code Sections, ERISA Law, and Department of Labor Letter Rulings.
• Pension Transfer Advisors
• BeneTrends, Inc.
• DRDA, P.C.
Certified Business Brokers (CBB), established in 1974 with headquarters in Houston, Texas is one of the pioneers of the business brokerage profession and is one of the oldest and largest business brokerage firms in the U.S. We are a founding member of the International Business Brokers Association (IBBA), which is the largest business brokers association in the world. If you are serious about buying a business, start with our Prospective Buyer Registration Form.