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Use Retirement Funds to Capitalize Your Business

So many times, business owners struggle to find cash to start, expand, or otherwise solve a cash flow problem in their business. Oftentimes the banks are not able to assist and the business becomes desperate for cash. It’s during this search for business funding that the owner considers taking money from a retirement account. This content is not written to argue the merits of using funds earmarked for retirement years. Rather, the focus is on how best to make use of those funds.

The Wrong Way

The simplest way is often not the best way. While the business owner might have immediate access to retirement funds, simply withdrawing those funds for business use could be extremely costly.

  • Federal income tax will be due in the year of withdrawal
  • State income taxes must be paid
  • If the owner has not reached age 59 1/2, a 10% penalty will likely apply to the funds withdrawn

By simply withdrawing $100,000 from a retirement account, the business owner should expect to lose 37% or more to Federal, State, and Early withdrawal penalty taxes!

What might not be fully understood is the fact that the owner will not have the use of the full amount withdrawn. Typically, reality sets in at tax filing time. The owner then realizes that even more money is needed to pay taxes and penalty on the funds previously withdrawn. It is a vicious circle that often results in the loss of large sums of money to pay taxes.

A Better Way

Many business owners do not realize that retirement money can be used to capitalize their business without incurring any taxes or penalties. While not as simple as the “Wrong Way,” the savings of income taxes and penalties make this alternative a much better option. Here are a few of the qualifications.

  • At least $50,000 in a retirement account or combination of accounts
  • Qualifying accounts include 401(k), IRA, 403b, 457, SEP, Pension Plans, Thrift Savings Plans, Annuities, KEOGHS
  • If using funds from a current employer, must separate from service in order to access
  • Roth IRAs and Inherited IRAs do not qualify
  • Spouse or business partner’s qualifying funds can be used

If you want to know more about this funding option or need help in implementing this popular strategy, simply give us a call about “ROBS Business Financing.”