Use your 401k to start a business

401k Small Business Franchise Financing 2013-05-02

Below is a typical question that I receive regarding using your 401k to start a business:

Can you please explain how you can use your 401k to start a business? I have read a lot of information online and I’m not quite sure it is allowed or not to use my 401k for business startup capital.  I want to open a boutique clothing store and have around $400,000 in a former employer 401k plan that I would like to use for the start-up costs.

The use of retirement funds in your 401k to start a business is permitted pursuant to ERISA 408(e) and ERISA Section 407, as long as it is structured as an investment in employer securities. For this reason when using your 401k to start a business, the following steps must be taken (i) a new C-Corporation is formed, (ii) which adopts a new 401k profit sharing plan into which your retirement fund are transferred and then invested in the C-Corporation via a purchase of newly issued common stock of the Corporation, and (iii) thereby injecting the business with capital which can be used to launch the business.

Other items to be mindful of when using 401k funds to start your business include the following:

  • The 401k profit sharing plan purchase of stock in the C-Corporation must be for adequate consideration;
  • The 401k profit sharing plan is prohibited from paying any commission to the facilitator in the transaction; and
  • The 401k profit plan must an eligible individual account plan as defined in ERISA Section 407(d)(3).

To learn more about the use of your 401k to start a business including the ongoing requirements, visit:

http://www.mysolo401k.net/401k-business-funding-FAQs.html

Or call 800-489-7571.