For new and prospective business owners, a rollover business startup is an effective way to turn an existing 401(k) in to capital for a business. In fact, as long as you have at least $50,000 in retirement savings, you can start a new business without taking out a small business loan. This can provide greater returns on investments than a traditional 401(k). Plus, it has fewer obligations than repaying interest on debt. New business owners have a lot to gain from a rollover business startup, as long as they know how to use it. Read on for hints on how to use a rollover business startup effectively.
Understand The Risks
While a rollover business startup can have a large advantage over a business loan, it’s far from a risk-free proposition. The most obvious risk is that the business fails. If this happens, business owners can find themselves with a greatly diminished retirement fund. However, even a moderately successful business will see far greater yearly returns than a typical 401(k) retirement fund. Unlike a business loan, a rollover business startup carries no interest rate. Additionally, there is no risk of personal bankruptcy should the business venture fail. However, there is a chance that you will be without a source for retirement income. Entrepreneurs should understand the risks of starting a rollover business before embarking on this venture.
Choose Which Industry To Invest In
While every business can benefit from being created via a rollover business startup, some businesses benefit more than others. High risk, high reward businesses are attractive for many reasons. For example, owners will not find themselves in debt or bankrupt should the business fail. Similarly, real estate ventures require a high amount of starting capital that many new business owners would not be able to obtain through a business loan. In any industry, the business must issue stock to the owners. If there are any employees, a 401(k) should be available as well. Carefully choose which industry you plan to invest in to determine the rollover business startup characteristics are compatible with your vision.
Meet The Legal Obligations
Since a rollover business fund is a way to access a 401(k) program without paying the normal tax rate, there are a variety of legal requirements set out by the IRS. The most basic one is that the company must be a C-Corporation. Additionally, there are restrictions on what the business owner can purchase with the funds of the new business. If a company formed this way has employees, they must be able to invest in the company in the same way the owner is invested in the company. A company must also have a concrete purpose that it is continually fulfilling. Otherwise, the IRS may think it is merely a shell corporation to avoid taxes. Fulfilling these legal obligations allows new business owners to avoid costly fines from regulatory agencies.
Use Your 401(k) To Fund Your Business
Next, roll your 401(k) funds to fund your new startup. Of course, a rollover business startup has many requirements. But it allows prospective business owners to use their retirement accounts to invest in a business. Working with your plan trustee or custodian, you can use these funds to directly fund your business. The most immediate advantage is that it has a much higher rate of return than a traditional 401(k) program. Additionally, while traditional lending services typically require positive cash flow and collateral, a rollover business startup does not. Unlike a typical 401(k) program, using funds in this way does not incur the 10% early withdrawal penalty. These advantages can help new business owners get started on the right foot.
Prepare For IRS Audits
As with anything involving the Internal Revenue Service, any rollover business startup runs the risk of incurring an audit if mismanaged. A 401(k) retirement plan is normally taxed as money is taken out of it. However, a rollover business startup avoids this by reinvesting funds in a business. Since this means that illegitimate businesses can use this to avoid paying taxes, the IRS watches businesses started in this way very carefully. Owners cannot set their salary too high, and cannot buy or sell certain properties from themselves or close family members. The owner is expected to make the best possible decisions for the health of their company at all times. Certainly, you may benefit from hiring a legal advisor. After all, a costly and time-consuming audit can hurt a legitimate business. New new business owner should follow the rules carefully and prepare for IRS audits.
Effectively using a rollover business startup is a great way for new business owners to raise starting capital for a business venture. It can offer much higher returns over a traditional 401(k) retirement plan as well as much lower risks than a business loan. While there are many legal obligations to abide, this can mean a new business owner can start a business with their retirement money. High starting cost businesses, such as real estate investment, particularly benefit from a rollover business startup. If prospective business owners can satisfy the legal requirements, they can find this to be a good way to utilize retirement savings to fund a business.