Despite the concerns about taking cash from retirement accounts to help in the purchase of a business, more and more buyers are learning about and pursuing this strategy. It has been a viable method of fund raising for that purpose, for a long time, yet it’s not as well known as conventional or SBA backed loans.
Among the reasons that some advise against cashing in a 401k for this purpose is that it means reducing the amount that will be needed by the individual, after retirement, when he or she may need to live on reduced income. The argument is that retirement funds should be increased, not cashed in and used, as an individual approaches the age when the money will be required. Many buyers are deciding, however, that their best investment for a solid financial future is a small business that will enable them to have more control over their working and earning lives.
Another concern about the strategy of withdrawing money from retirement accounts is that the individual will be taxed on the withdrawal, likely at a higher tax rate than usual, because that extra money will place him or her into a higher tax bracket. The fact is, however, the IRS rules clearly permit an individual to make business investments with a distribution from a retirement account without incurring any added taxes. But this isn’t a DYI (do it yourself) project. The procedure involves rolling over retirement money into a corporation that is set up to first receive the funds, and then to purchase the business. If the procedure isn’t carefully followed, the result could be a large tax bill. So it’s important to get help from a business purchase loan specialist with experience in this procedure. If done correctly, money set aside for the future can be put to work now, if the investor has found a good business to buy, and decides that this is the best use of the funds to enjoy financial security in the future.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.