When it comes to owning and operating a business, finding the right form of financing can be an arduous task. Where do you find the necessary funding to seed a business, buy a new one or raise additional working capital? Traditionally, business owners have used bank loans, SBA loans, personal loans, credit cards or home equity to satisfy their funding needs. The biggest downside to these sources of financing is the debt load and corresponding payments. Additional debt can impair one’s ability to access money in the event that “life happens.” That is why the idea of using retirement funds to inject cash into a business has been gaining popularity. Although relatively few know about this concept, it has been growing in popularity, especially among those purchasing small businesses and franchises. When structured by experienced retirement account specialists, this strategy allows for an individual's retirement account to invest directly into their business venture… without taking a distribution and paying taxes and penalties.
The BackgroundThe IRA and 401(k) were created in 1974 when Congress passed the Employee Retirement Income Security Act (ERISA) to address concerns that private pension funds were being mismanaged by employers. At that time, the IRA and 401(k) transferred the responsibility of retirement investing from the employer to the employee. There are only two types of investments into which employees can’t invest retirement-account monies: life insurance and collectibles. Consequently, retirement accounts are far more flexible and practical than most people realize. And there are many more investments that can be made with them –- like buying a personal business — than the greater population realizes.
New Trend in FinancingIn order to fund their business, many entrepreneurs have taken early distributions from the IRAs and 401(k)s and, as a result, have incurred thousands of dollars in taxes and penalties. If they had known of this unique account structure, they could have purchased their business as a legitimate retirement account investment. This funding strategy provides less business debt and greater long-term potential for retirement funds. Using retirement money instead of traditional business or home equity loans enables more money to be reinvested back into the business instead of toward debt. In addition, since the retirement account owns a portion of the business, profits from the business can be returned to the account tax-deferred.
For those looking for financing their current or new business venture, their own retirement account just might be the answer.
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