QUESTIONS: Hi there – I found your website, and interested in more information on a rollover to fund a new venture. I read on your blog that Roth funds are not eligible for this treatment? And, that the corporation must have revenue in order to pay any salaries? Can you elaborate on those details? I currently have a distribution in my 401K that looks like this:
PRE-TAX 401(K) 1.01%
EMPLOYER MATCHING 18.87%
ROTH 401(K) 34.66%
BONUS ROTH 401(K) 2.07%
EMPLOYEE ROLLOVER 43.39%
Can you tell me which of these categories of funds could invest in the C corp that would hold the 401K?
ANSWERS: The current regulations surrounding the purchase of employer securities (i.e., stock shares in a C-corporation where the 401k owner/participant is an employee of the corporation) by an employer sponsored 401k do not allow for the use of Roth funds in purchasing employer stock. Simply stated, it is an internal revenue code regulation that only pre-tax 401k funds may be used to purchase employer securities. That said, all the above fund sources may qualify with the exception of the Roth portions.
With respect to paying yourself a salary, yes the corporation must have revenue in order to pay salaries. If a salary is paid before the business is generating revenue, it will be deemed as circumventing the 401k distribution rules which are subject to 20% mandatory federal tax withholding payable by the 15th of the month following each distribution. The 20% federal tax would need to be paid electronically to the Department of the Treasury. Further a 10% early distribution applies if the 401k owner is under age 59 ½ at the time of the distribution.
In sum, the use of retirement funds to finance one’s business start-up or franchise is not prohibited under the IRC or ERISA regulations, provided the rules are followed.
To learn more about the use of retirement funds for financing your own business and the IRS take on it, please visit the following links.
Thanks so much,
Tom in California