How to Finance a Business: 401(k) and IRAs

Welcome to the fourth and final part of the How to Finance a Business series! This series explores different ways to get the financing for your business, regardless if you’re financing your own startup or buying a business already on the market. For many people, money is the only thing standing between them and their goal. You’ve got the business plan to make it work and the drive to see it to the end: all you need is someone who shares your entrepreneurial spirit.

Part Four: 401(k) and IRAs

For the final topic in our series, we’re looking at one of the most non-traditional way of buying a business. This isn’t funding your dream on bank loans and credit cards, securing the sought-after SBA loan, or even selling off your personal assets. Instead it’s using your existing funds in your retirement accounts, such as a 401(k) or IRA, and rolling them over to by an existing business or start up a new one. The two methods discussed below, the BORSA and ROBS, do so without actually touching the funds, which avoids certain fees and taxes.

BORSA and ROBS

The BORSA (Business Owners Retirement Savings Account) and the ROBS (Rollovers as Business Start-Ups) are both similar ways to complete the same objective: the transfer of your retirement account funds to a business (new or current) as a method of buying that business without actually removing funds from your 401(k) or IRA, and therefore having to pay interest and taxes on the “borrowed” amount. You also avoid any Federal penalties for using retirement funds.

How It Works

The process is not unlike consolidating retirement accounts, where you would “roll” the funds of your 401(k) or IRA (usually stock and mutual funds) into another account. However instead of this new account being another 401(k) or IRA, it is instead a BORSA or ROBS account.

• Your 401(k) or IRA is transferred into existing business (the one to be bought) or a shell company (for starting a business) as 401(k)/IRA options.
• The funds of this new 401(k) are invested into the purchase the company’s stock (exchanging the current account portfolio for the company’s). Both are tax-exempt, as both are retirement accounts.
• For a currently existing business, you’re buying stock and therefore control over the company from the existing owners.
• For a start-up, these funds have the purchasing power of the retirement account and can be used to start the business.

IRS and ERISA Compliance

Because you’re attempting to avoid withdrawing funds (and therefore the payback interest and taxes that occur), there are some very strict guidelines and rules that have to be followed, outlined both by the IRS and the ERISA (Employee Retirement Income Security Act). Failure to follow these rules will result in taxes and penalties on the funds, and could lead to legal issues such as tax evasion or creating a tax haven. As such it’s important before and during this process to have a CPA firm assist you in the process, one that both understands retirement accounts and the BORSA or ROBS process.

At George & Company we’ve seen and made a lot of businesses happen, including aiding people obtain the financing they need to succeed. If you’re interested in buying or selling a business, or getting the assistance you need to make that happen, please contact us and we’ll put our skills in M&A, brokerage, appraising and financing to work for you.