How to use a 401k to fund your business

After a person’s residence their 401(k) is often the second largest investment. And with volatility in the markets more entrepreneurs are turning to their retirement for funding their business dreams.

how to use a 401k to fund your business

This little-known transaction called a “rollover-as-business-startup” or ROBS is now being used more often by people who want to go into business but don’t have sufficient funds for financing.

In financing a start-up or buying a company using ROBS, an individual roll-over funds in is 401(k) or IRA account to fund a business venture. It may sound like a very simple process, but it’s actually a very intricate one and there are professionals in the industry who can administer the roll-over of your funds to your new company. But like in other forms of financing there are also good and bad sides to it.

The number one reason why people are enticed to using ROBS is because they don’t need to get a loan to get the funds they need. Also, a ROBS transaction is tax-free. This means that the individual will get all the money he has rolled-over to fund or buy a company. There are some reports that the IRS is now looking at this particular aspect of ROBS because it might be abusive, but as of now the entire transaction is still not taxed.

People should also remember that when they use ROBS to finance a company, they also need to adhere to strict tax code compliance and follow ERISA rules. ROBS funded companies who failed to strictly follow some of the guidelines set by the IRS can be fined by a huge amount of money.
Lastly, while the ROBS transaction is tax-free and there’s no loan which needs to be made here, entrepreneurs must pay fees to “promoters” who facilitate the transaction. Most of them charge at least several thousand dollars for completing the transaction.

So there you have it, an overview of what ROBS is and some of the good and bad sides to it. Now, it’s up to you whether you’ll use it in funding a business venture.

If you are a first time entrepreneur or have run your own business before but are you have a new idea you are considering launching I hope you will consider taking part in my #1kStart challenge. You can find out more here.

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