Business Financing 401k Flow for Subsequent Stock Investment in the C-Corporation

May 18, 2018 | By Mark Nolan

QUESTIONS:

How does the release of funds work after I open the C-corporation that is funded with my business financing 401k plan?

I guess my question is, do I need to send some sort of request every time I need to use the money, does it need to get approved, or the money is available freely, and I can use it however I want, as long as the money is flowing into the business?

ANSWERS:

It is a two-step transfer process. First, the funds will flow from the existing retirement account to the new 401(k) sponsored by the new C Corporation. Then you will invest however much you want to in the stock of the C Corporation such that the funds will flow from the new 401(k) account to the business bank account of the C Corporation. The funds that are invested can then be used for any legitimate business purpose by the C Corporation. While you can make subsequent investments of 401(k) funds in company stock, each investment would need to be documented as a subsequent stock purchase which may require obtaining a valuation of the company to determine the fair market price per share (and moreover, if there any other employees participating in the plan at the time of the subsequent stock offering these individuals will be need to be given a chance to invest their 401(k) funds in company stock as well at the time of the subsequent stock offering).