Yes it does! I recently contacted a colleague of mine who suddenly quit work. I caught wind that he helped fund a new franchise business with a 401k. Below is my email to him and his response. I think my conversation with him might open some eyes!!!!
XXXXXXXXXX,
I was just talking to XXXXXXXXXX today, and he mentioned your story to me. He knew I would be interested in what you had done with your business and your 401(k). If it's not too personal, I was wondering if you would mind going into more detail on what you had done to fund your startup. Here's the story as I think I understand it…
Work at Company A and contribute to a 401(k)
End work at Company A
Start work at Company B and contribute to a separate 401(k)
Start a C-Corp and issue x dollars in stock
Roll Company A's 401(k) into another IRA that allows you to buy shares of private companies
Use the IRA to buy x dollars in the stock of your own company
And there you have it…the ability to have full, pentalty free access to your retirement funds for your business! The main question I have is what company did you use to hold your company A's 401(k)? What kind of fees did you have to pay? What was the cost to start up your C-Corp and issue shares? Recommend a good lawyer and accountant? Did you take out any loans (SBA or?) to fund your business? Lessons learned? Thanks a lot! Congrats and best of luck to you!!
HIS RESPONSE:
The above is the overall steps taken, but there is a lot more to consider. First, the 401K's are overseen by the Dept of Labor, and the IRS is second in authority. The DOL opinions can override the IRS.
I used a company called Guidant Finacial services, and they charged $5,000.00 for the service. They set up the 401K, the corporation, directed me to an attorney (separate from mine). Of course, they are not on the hook if the IRS challenges it. You might think it is easier or cheaper to Do It Yourself (DIY), however, I have learned that DIY is expensive. Brain surgery and dental work are not DIY, and I did not feel messing with the IRS is DIY.
Also, a very important point:
when you sell the stock, you need to show you put up a minimum of 5% to the company. So, If you roll over $100,000, you need to show you personally spent above the $100,000 5%. Yes, the $4,995.00 fee to Guidant does count towards this 5%. Next, they recommend there be more than 5%, and also another investor. This makes it more legitimate, so you don't get the dreaded "Self Dealing" judgment by the IRS. If you can bring in a trusted person to buy some of your stock, say a relative who buys the stock. SO, they could buy 5%, you put in 5%, and the 401K buys 90%. The third party helps get away from the self dealing. If you can get the relative to give you the money, they can do it tax free; relatives can give away a certain amount every year (I do not know the amount; I think it's around 5 or 10K).
And there you have it…the ability to have full, pentalty free access to your retirement funds for your business!
The main question I have is what company did you use to hold your company A's 401(k)?
Guidant is at http://www.guidantfinancial.com/ I talked to another person who purchased a franchise company, and he found that Guidant was the most responsive and easiest to use. I did not have the time to shop around, so I used them, and am content.
They have a Conciege who gets you in touch with whoever you need to talk to. Call Susan Brunk at 1-888-472-4455 ext 3231 or susan.brunk@guidantfinancial.com and let her know I sent you. She can get an info package in the mail to you.
What kind of fees did you have to pay?
$4,999.95. Sounds like a lot, but look at it another way. If you have a lot of funds in your 401K, and you feel you can get 50% return out of a franchise business, or get 8% if you leave the funds in a 401K, how much would you pay to get to the money? Also, I could have gone for a business loan (no prior business experience), or a 2nd mortgage. The second mortgage would have const me $5,000 in origination fees, and I would have to pay monthly payments. WIth this 401K plan, I do NOT have loan payments. The cost of access to the funds will be paid off by the value of the franchise business.
Other ongoing fees NOT covered by the $4,995:
There is a lot of paper documentation. I have to keep a close tab on my corp (OK tax commission, IRS, etc). I have to pay myself a salary. I have to pay a CPA to keep things up. I bought Quickbooks PRo & Payroll to helps (this fee went towards the 5%). Still, in the long run, it is better than a second mortgage. I also like having a CPA handle it all for me; that way I can focus on my business & customers.
What was the cost to start up your C-Corp and issue shares?
That was part of the $4,999.95
Recommend a good lawyer and accountant?
I recommend Michael Jones at Jones law office. http://www.joneslawoffice.com/About.htm
My CPA is Pam Edwards http://www.edwardstaxandaccounting.com/ They both sat in on the conference calls with Guidant, so they already understand how this process works.
Did you take out any loans (SBA or?) to fund your business?
No. Would take too long, and the y are loans that have monthly payments (negative cashflow). The 401K instead pays me a monthly salary.
Lessons learned?
It takes longer than I thought. I had to wait till I quit to get to my 401K. You can't complete the process until you have all the checks from the rollovers in-hand. So, I used credit cards to go to franchise training, and will have the corporation pay back the loan. Make sure the CPA and attorney have paperwork drawn up to properly document this.
Thanks a lot! Congrats and best of luck to you!!
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