Conventional wisdom dictates that there are really two real paths to lasting wealth: entrepreneurship and wise investing. Investing may be the easy part, especially if you have been steadily investing in your employer sponsored 401k plan. It is starting your own business that may be the challenge, as many franchises and financial institutions require large cash reserves before they will even consider doing business with you.
Starting a business can be your best avenue to true financial freedom as growing and preserving your capital is critical to your financial future. For most people, their retirement account is the second largest source of funds after their home, and it may be tempting to access these funds when in need of capital for your business venture.
There are two ways to answer the question, how do I structure my 401k to buy a business? And each strategy comes with its own benefits and drawbacks. You should always seek the guidance of a trusted financial adviser, such as the experts at ETrade, to better analyze the unique details of your financial situation.
How Do I Structure My 401k to Buy A Business: Withdrawal Funds From Your 401k
With an employer sponsored 401k plan, you have the option of withdrawing funds from your account at any time. If you are younger than 59½ however, you may want to consider the possible tax and penalty implications this withdrawal could have.
Distributions from your retirement account prior to you turning 59½ are subject to your normal personal income tax rate, as well as an additional 10% penalty. It is not difficult to see how these taxes and fees can quickly add up and eat away at capital.
There is a lot to consider when thinking about implementing this strategy, and the potential benefits and drawbacks will vary according to your specific situation. The benefits and future profits from your business could far outweigh any short-term tax losses, or the loss of capital due to taxes and fees could be too large to justify. Only you and your financial adviser can decide if this approach is right for you.
How do I structure my 401k to buy a business? You may also be considering using a loophole in the system to briefly withdrawal funds use them for a short time and reinvest them before the time limit is up. When you utilize this method, you will effectively be performing a rollover to a new retirement account, and the IRS sets strict rules and time constraints governing rollovers.
You absolutely must be certain that the funds can be repaid within the 60 day time frame set by the IRS, if you use this strategy otherwise you will be subject to the full course of fees and penalties imposed on early withdrawals.
You can not be too cautious when utilizing either of these strategies, and you should be in consult with a professional retirement account expert or accountant every step of the way. If your account is with online broker ETrade, you have access to the industry’s top professionals to answer all of your investment and retirement questions.
How Do I Structure My 401k to Buy A Business: Invest In Your Own Corporation
This is another strategy that will require you to be very close with your financial adviser and accountant because it involves investing your 401k funds in your businesses through stock purchases. The implementation of this strategy can be complicated, and it is always wise to consult with experts every step of the way.
How do I structure my 401k to buy a business? The first step is to form a corporation and make yourself an employee. You can then open up an individual 401k plan online at brokerages such as Zecco or ETrade, and rollover your existing retirement funds into your new account.
In this type of self-directed 401k, you will make all of the investment decisions for the new plan and can invest in any assets or securities you would like. You would then use the funds in your 401k to purchase stock in your corporation, and your company then uses those funds to finance operations such as expenses and salary.
It is critical to remember that you must be making investments not distributions in order to avoid taxes and fees on the funds used to finance your business. In this system you are converting your retirement funds into immediate business capital with no tax or early withdrawal penalty.
Remember to do the required research prior to committing any capital, and take into account your specific investment objectives.
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