Using a 401k to Buy a Business

While the Employee Retirement Income Security Act of 1974 (ERISA) permits the use of 401k retirement funds to buy your own business (commonly referred to as rollover as business start up (ROBS), the following rules should first be understood before using your 401k funds to buy a business:

  • The ROBS 401k/PSP arrangement calls for the purchase of stock shares; therefore, only a C-Corporation structure qualifies.
  • IMPORTANT: Don’t confuse the use of funds borrowed from the 401k (known as a 401k participant loan) with the use of 401k funds to buy a business. To clarify, under a 401k loan, the 401k owner uses the borrowed funds to personally invest in his own business, whereas under the ROBS arrangement the 401k, not the 401k owner, invests directly in the C-corporation. As a result, among other things, all of the 401k funds can be used to buy a business.

Still Employed

  • If your only source of retirement funds is a current employer 401k and you are under age 59 1/2, you may not be able to access these funds. Reason being, the current employer has the authority to restrict your access to those funds until you leave the employer.

The Benefits of Buying Your Own Business with Retirement Funds:

  • Neither taxes nor early distribution penalties apply under the Rollover Business Startup (ROBS) transaction because the funds that were transferred from your former employer plan and/or IRAs are directly rolled over into the new ROBS 401k/PS which are then invested in your own C-corporation.
  • Because the use of 401k funds to buy a business is not considered a 401k participant loan but rather a stock purchase, you do not have to contend with paying back a loan, which can be challenging during the initial years of the business.
  • Securing funding for your business purchase usually takes 14 to 21 days.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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