Is 401(k)/IRA Business Funding Right for You?

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When you’ve done all the work to determine whether you’re ready to start your own small business, it’s time to see what financing option makes the most sense. For some small business owners, the choice comes down to asking a simple question: Is 401(k) business funding is right for you?

There is no simple answer to the question. It is predicated instead on having a clear sense of your business, your finances, and your comfort with using retirement funds in this way.

As seen in the recent post, ROBS: The Best-Kept Secret for Funding Your Dream Business, using a Rollover for Business Startups (ROBS) plan offers powerful, valuable incentives. The money you use can be made available quickly. In addition, you can access the capital without risking upfront taxes or early withdrawal penalties.

Download E-Guide: Definitive Guide to ROBS

Checking Eligibility

One of the most important steps you can take is to make sure that you are eligible to participate in a ROBS strategy. Specific guidelines must be followed in order to adhere to the Internal Revenue Service (IRS) and Department of Labor (DOL) guidelines. The ROBS process is based on Internal Revenue Code (IRC) and ERISA regulations that have been in use by large corporations for years.  In October 2008, the IRS, in a memorandum to Employee Plan field auditors, stated that these (ROBS) plans are in compliance as long as they are properly designed and operated.   

Most types of retirement funds can be used for a ROBS arrangement, the exceptions being Roth IRAs and Inherited IRAs.

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Knowing the Benefits and Risks

Understanding the benefits and risks are also important factors.

One of the key benefits of the ROBS structure is that you have is no penalty for early withdrawal and you will not owe taxes on the retirement funds. The program is not a loan from your retirement fund either. As such, that means you will not owe interest like with a traditional loan and you will not have to pay back the principal. You will carry less overhead and have fewer startup risks when using a ROBS.

What is more, you will have complete control over how you use the retirement funds. Other strategies that use retirement funds restrict the usage of the funds. With a ROBS plan, you can use the money for operating expenses, hiring and paying employees, buying inventory, marketing your business, or expanding.

You will need to remain compliant with guidelines governing a C corporation and you will not have access to the retirement funds you use as part of the ROBS unless you replenish your retirement accounts.  With the guidance from a team of professionals, like Benetrends, you will be able to accomplish both.

At Benetrends, we have pioneered the use of 401(k) or IRA funds to help fuel entrepreneurial dreams. Our experts can help you with the process of establishing the right business structure, establishing and transferring your retirement funds, and getting access to your money. To see how we can help with your small business and provide other business services,  schedule a consultation today.

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