Traditionally, business owners have used SBA loans, personal contacts, retirement distributions, credit cards or home equity to satisfy their funding needs. The biggest downside to these sources of financing is the accrued debt and corresponding payments. They can pinch the business’s cash flow and impair the ability to access money in the event that “life happens.” This is why the idea of using retirement funds to inject cash into a business has been gaining popularity. Although few know about this new concept, if structured correctly it allows for an individual’s retirement account to invest directly into their business venture without taking a distribution and paying taxes or penalties.
There are street-smart (but absolutely legal) ways to get the money you
need when you don't have it yourself (or don't want to use your own cash).
The Background
The IRA and 401(k) were created in 1974 when congress passed the Employee
Retirement Income Security Act (ERISA). The IRA and 401(k) transferred the
responsibility of retirement investing from the employer to the employee.
The rules surrounding these plans are complex; the laws state that
retirement plans are prohibited from only two types of investments: life
insurance and collectibles.
New Trend in Financing
Retirement Account Facilitators (RAFs), such as Bellevue, WA-based
Guidant Financial Group, Inc. help structure specific retirement accounts
that enable investment into private businesses.
“This investment strategy has been implemented for [more than] 15 years
and has been legal since ERISA passed in 1974,” said Joe Wishcamper, general
counsel for Guidant Financial Group.
This industry, bolstered by the stock market performance of recent years,
has been growing at a rapid pace as more entrepreneurs pursue owing or
financing their business this way. Wishcamper said that “last year [Guidant]
structured retirement accounts for about 800 clients. This year [Guidant]
will structure retirement accounts for more than 1500.”
The main reasons a business owner would want to turn to their retirement
accounts for financing include the added advantages of less business debt
and greater long-term potential for their retirement funds. By using
retirement money instead of a traditional business or home-equity loan,
business owners can avoid costly debt service.
This enables more money to be reinvested into the business instead of
sending cash to a bank each month in the form of interest payments. In
addition, because the retirement account owns a portion of the business,
some of the profits from the business can be returned to the retirement
account tax-deferred.
If you are looking for financing for your new or current business
venture, your retirement account just might be the answer. Before proceeding
with this type of investment strategy it is important to understand all the
benefits and risks involved when investing retirement dollars into your
business or franchise.
