As retirement comes closer, most people usually dream of spending relaxed and carefree years ahead. Having spent decades working hard, retirement is supposed to be the well-deserved break where work is the last thing they think about. However, times are changing and so are the attitudes. Retirement plans no longer consist of relaxing or traveling, but more and more people are considering taking the entrepreneurship route post-retirement.
Many retirees are considering setting up that business by putting their self-directed IRA to a different use other than the one initially intended. Numerous small-scale businesses run by this segment of people are constantly cropping up, with success. Along with years of experience and business acumen, this seems like a great idea for many.
The method described below utilizes retirement dollars to fund a new business and will require an experienced Third Party Administrator.
Once you have decided to go ahead with the plan, you need to follow five basic steps to set up the business.
This Mechanism is called ROBS – Rollover for Business Startups
1. Establish a C-corporation
Before you create or buy your business, create a C corporation and ensure that the incorporation process is accurately completed. An S corporation or limited liability corporation and other structures do not offer the required legal framework.
2. Design a Qualified Retirement Plan
The next step is to use the C Corp to sponsor a new 401 k qualified pension plan.
3. Rollover Process
Roll over your 401(k), IRA or other retirement assets you want to use for setting up your business into the new plan.
4. Fund the new business and treat it as an asset
Consider your new business as an asset. You actually wear two hats at this point. You manage the C Corp and you are the trustee of the new plan. As such you are the person responsible for the investment options available to the plan. You make a decision to purchase the shares issued by the C Corp. The new company is now funded and debt free! Many companies selling Franchises use this method – the IRS has approved it for over ten years but very few people are aware of it.
5. Become a Shareholder
After the required investments are made and the money is in the corporation, you can use the cash for conducting the business and carrying out business transactions.
It might be an extremely bold step to dip into the retirement savings to start a new business, without knowing its fate and people around you would applaud you for taking the big step. As with the start-up of any business, there are pitfalls. In most cases, people using a ROBS program have dreamed about this for a long time. So hopefully, you have researched the market, know what you are about to get into AND start debt free. Most businesses fail for two reasons, not knowing your market and too much debt. With the help of highly qualified financial advisors, you can greatly minimize this risk and run a successful business.
Consult with companies specializing in the handling of the same and interact with people who have done it before. When you cut down your risks, do your share of research thoroughly and are prepared well, the chances of success also rise. We, at SD Retirement Plans LLC, can help you in realizing your entrepreneurship dream. We have a qualified team to guide you on how to use your 401 (k) and IRA for setting up a business and offer you sound advice that will help in making your dream business a success.
One more benefit is over time the C Corp can repurchase the shares at the then market value so the Plan is paid back and has funds for future investments!
We cannot stress strongly enough how important it is to use professional help. The IRS does take a good look at this program, but if done properly there should not be a problem. It is when people take short cuts they get in trouble.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.