With the challenges of raising capital higher than in the past, many people are looking for alternative sources of financing to bridge some money gaps or even launch a new business. Many of you know that if you withdraw retirement funds prematurely and don’t pay it back by the end of the year, you will get hit with big penalties on your tax return.
The WSJ has these tips to watch out for:
- Do this wrong and you risk paying taxes on your retirement savings as well as facing hefty penalties.
- Be very cautious about using your nest egg for a business start-up.
- Such investments fall into a gray area of the law, according to tax experts.
The Gray Area to Make This Work if You Want To
From the same WSJ article -
“There are ways to use IRA and 401(k) funds to finance your start-up business. But it isn’t simply a choice of writing yourself a check. There are significant legal steps. The key is rolling over the money into a corporate retirement account that permits you to invest in the business.
A nonexpert would likely need the help of a financial planner or third-party retirement-plan administrator. These professionals set up a C corporation and establish a corporate retirement account. A person can then roll outside retirement accounts into the corporate plan and invest the money in the company’s stock. Since the person is buying shares of his or her own business, he or she is effectively feeding it money.”
If You Do Decide to Fund Your Business this Way, Get an Expert
If you do decide to go this route, the only thing I can say without question is to hire a professional firm that does this sort of thing so your paperwork and filings are proper. The WSJ article points out “Advisers are likely to charge several thousand dollars to help set up a plan and levy hefty annual fees. So this strategy makes financial sense only if a person is investing a big chunk of their retirement money in a business.” I still would do this since the money you spend would probably outstrip the money you would lose if you do this wrong.
You Should Look for Other Sources First
Now I am not saying you will fail but there is a high likelihood you might and you will be out of your retirement savings which can be devastating. If I could give an advice from personal experience is to look at non-retirement assets first. This includes savings and brokerage accounts. You should also stay at your day job and put away six months of savings so you can work to get the revenues up and not tap into long term savings. The other obvious choice is friends, families and acquaintances if you want to go that route and that is a whole other blog post there.
Lastly, a few good resources to read up this some more and make your own decision:
From SCORE: Funding a Business with Your Own Retirement Funds (pdf)
From the Wall Street Journal: Funding a Start-up – How to Tap an IRA or 401(k) – Small Business …Google+