Using Retirement Funds to Buy a Business

For many professionals contemplating a career transition, the idea of owning a business is both exciting and daunting. A common obstacle is the lack of readily available liquid capital for a down payment, particularly when much of one’s savings is tied up in retirement accounts. Something many people don’t realize is that it is possible to leverage certain types of retirement funds to purchase a business without incurring early withdrawal penalties or taxes.

Contrary to popular belief, your retirement funds are not limited to investments in publicly traded stocks or mutual funds. Qualified retirement plans, such as 401(k)s and other pre-tax IRAs, can be structured to allow you to invest in or purchase a business. This strategy, often referred to as a Rollover for Business Startups (ROBS), offers a legitimate and IRS-approved pathway to using your retirement savings as a source of funding. We work with several highly respected providers that manage these programs and we match our buyers with the right provider at no additional cost to them.

Benefits of Using a ROBS Plan:

1. No Early Withdrawal Taxes or Penalties: By properly structuring the transaction, you can avoid the hefty penalties typically associated with early distributions.
2. Reduce/Eliminate Debt Burden: Utilizing your own funds minimizes or eliminates the need for external borrowing, which can reduce financial stress and risk.
3. Access to Up to 100% of Your Retirement Funds: Depending on your plan, you may be able to use a significant portion of your existing funds.
4. Expert-Managed Solutions: The program setup and ongoing administration are handled by seasoned professionals, ensuring compliance with IRS regulations.
5. SBA Approval for Equity Injection: The Small Business Administration recognizes this structure as a legitimate source of equity, meeting federal guidelines for business acquisitions.
6. Speed: SBA loans can take 45 – 60 days to close. ROBS Plans are able to fund business acquisitions much faster with fewer contingencies, which may even help you win a deal in a competitive buying situation.

How It Works

The process involves rolling over funds from your retirement account into a new corporation that sponsors a qualified retirement plan. This plan then invests in your business, allowing you to use the funds for a down payment, full purchase, or operational expenses. It’s crucial to work with experienced providers to ensure compliance and smooth execution. We have best-in-class referral partners and we’ll be happy to make introductions for you.

If you’re serious about purchasing a business but are uncertain about funding options, leveraging your retirement savings could be an ideal solution. This approach requires careful planning and collaboration with your advisors—such as your attorney, accountant, and financial planner. If you’d like to explore this option further, contact us at 573-335-1885 to discuss your goals and learn how we can help you achieve them.