For most Americans their 401k represents a large portion of their net worth. What many don't realize is they can use these funds to acquire or purchase a business even before the turn 59.5 without the penalties. While SBA funding and other bank loans may be in consideration one should consider their options and weigh the closing cost involved. Sometimes using your own savings makes perfect sense.
Get cash out of your 401(k) or IRA to help finance your new business, without creating a taxable event.
Say you have $100,000 in a 401(k) or IRA and take an early distribution (before age 59.5), the following taxable events would be triggered: a 20% mandatory hold-back, Federal (and state) income taxes (at higher tax rates) and a 10% early withdrawal penalty. This could easily be a $45,000 tax bite.
Take early distribution Adopt Self Directed Retirement Plan
Amount in retirement fund: $100,000 $100,000
Mandatory 20% withholding: $20,000 0
Cash available to withdraw: $80,000 $100,000
Less ordinary income taxes (at 33%) $33,000 0
Early distribution penalty (10%) $10,000 0
State income taxes $2,000 0
Total taxes & penalties: $45,000 0
Cost to set up transfer trust: $5,000 estimated
NET CASH available: $55,000 vs. $95,000
With the adoption of a Self Directed Retirement Plan, you are able to convert existing retirement funds into privately-held stock in your new business. This tax-deferred trust is coupled to a replacement plan that contains special "exemptive clauses." Your new business gets the cash it needs from the sale of a portion of its stock to your trust plan. The trust is unique in that it will provide custodial services to administer non-publicly-traded stock.
Enterprise Brokers works with several legal advisors to implement the usage of 401k tax programs. Note we are not licensed to make these transactions but we can help you find the right specialist.