Can you use your 401k to buy a business?

As of May 1, 2008, the Small Business Administration (SBA) requires 25% down from the buyer versus 20% down. SBA lenders are also now requiring the buyer to spend $2,500 to $3,500 for a third party valuation in addition to their hefty fees. Because of these changes along with the tightening up of financial institution, many of our buyers are opting to use their 401K funds to purchase a business.

There are several IRS approved companies that will set this up without any tax consequences or penalties. Here is how it is done. Either the approved IRS company can set up a new "C" corporation for you or you can have your attorney do this. The "C" corp. then creates a new retirement plan. The funds from your existing retirement plan are rolled over into the corporation's new retirement plan. The last step is that the new retirement plan purchases stock in the newly-created C-corporation.

When your new company can afford to pay back what you have borrowed from your retirement plan, you can then change your C corp. to an S corp. which is typically more desireable when you are ready to exit your business. There are fees, of course, for doing this; however, it is a very creative and legal way to put your retirement money to work for you. Before you move forward with any loan, make sure the investment is a sound busness decision.