USING ROLLOVER IRA/401K ASSETS TO FUND A SMALL BUSINESS
I recently started to research using my rollover IRAfund to fund the purchase of a small business that i will run directly. Apparently this can be accomplished by opening a C-corp, and establishing a 401k plan in the new C-corp. Your exisitng Rollover IRA is then rolled over into the newly formed 401k plan. THe new 401k then purchases stock from the c-corp and the cash proceeds go into the C-corp to be used to buy an existing business or start-up business. Effectively, the new 401k then owns stock in the c-corp, of which you are both an employee and an owner. You are required to contribute a portion of earning from the business into the new 401k….also you can enjoy current income by paying yourself a reasonable salary that is taxed as personal income.. There are some boutique shops in Texas that offer this structure (for a price about $5k) and then charge $800 per year for maintenance and admin fees on this BORSA plan (Business owners retirement savings account)…My question is has anyone heard of this structure before,,,,is it legit?? why dont any firms in New York offer this?? Id hate to set it up and then get hit with early withdrawal penalties Any insight would be appreciated Thanks Ed
Permalink Submitted by mk foss on Thu, 2009-03-12 17:24
The IRS is looking (not favorably) on these arrangements. Denise posted something about this November 8, 2008 in the forum. You’ll find a link there to an IRS notice.
Permalink Submitted by Alan Spross on Thu, 2009-03-12 20:11
Here is article:
http://www.retirementdictionary.com/ersops_robs_complinace_issues.htm
Permalink Submitted by Ed Dooley on Fri, 2009-03-13 03:56
Thanks for feedback..seems that the IRS doesnt have an issue with these plans so much from a structural sense..but more on an operational basis…ex. individuals using funds for purposes other than to fund the business, improper filing and administration of the 401k plan, especially when it comes to making employees of the C corp aware of their options in investing in rolling assets over to the new 401k and investing in shares of the c corp.
Permalink Submitted by mk foss on Fri, 2009-03-13 17:25
The owner of the 401k plan cannot benefit personally from the investment. That means more than not just acting in a business-like way. Receiving a salary from an entity owned by a retirement plan, even having your name associated with the business could be enough for IRS to disqualify the plan. It’s very risky especially when they’ve put folks on notice that this is an area they’re looking into.