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Robrunyan
05-01-2006, 11:43 AM
Could anyone please share their experiences using 401(k) funds for business purchase? Not a loan, but using one of these services, such as Guidant, Benetrends, and Directed Equity that set up corporations that allow you to use your 401(k) money to buy stock in your new business and therefore avoid the taxes and penalties that you would normally incur with an early withdrawal? Thanks for any insights or experiences.
Rob. :D

Orion
05-16-2006, 10:11 AM
You do not state what amount of monies you are working with, nor do you tell us the type of business. Please give more details.

NewBizWoman
05-23-2006, 07:46 PM
Oh my gosh, this is the exact same question that I have. The companies I have seen are BeneTrends, Inc. (apparently the inventor of this creative funding option), Guidant Financial and SDCooper.com. All of them claim to have a process through which you can use your 401k funds as investments in your business without any penalties or tax consequences.

Basically, from what I understand, you have to have a C-corp set up for your business. Then, after paying a hefty fee (around $5,000), the company will create a Profit Sharing Plan & Trust (PSP&T), where you will rollover your 401k. Once rolled over, the monies can be transferred to a corporate bank account, and your C-corp will issue shares of stock to the PSP&T. These organizations claim that this is totally legal and in fact, the IRS will send you a favorable determination letter (although this could take up to a year to receive).

So, what I want to know is:

1) Has anyone out there used these services, and if so, what was your
experience?

2) Does anyone have enough knowledge of the IRS regulatios and retirement funds to know whether this is really legit?

Seems to me that the IRS's position is clear on retirement funds - you aren't allowed to access the funds for personal use without paying a penalty and taxes, so if this is the case, it sounds like these companies found a way to "get around" it.

FYI, a friend of my who is a corporate attorney checked with her attorney friends and one response was that this is "an IRS deemed 'abusive transaction'.

Any input?

Eric5052
05-26-2006, 01:45 PM
One of my family members used Guidant to set up an account. She was very happy with Guidant, and after speaking with Guidant her accountant was on board with the idea. They even paid for her to talk to a third party attorney about the structure. The problem is that most people have never heard about this type of thing, and it scares them. When you talk to your lawyer about something like this they are naturally going to be hesitant, unless they know all the facts. The reason why is that if they give you bad advice you can go back and sue them. My family member had the same concerns, and so she had her accountant talk to Guidant directly as well as talk with the 3rd party attorney. After the accountant learned about the structure, and was able to verify it himself, he felt good about it. I would recommend you doing the same thing with your attorney if you are worried about the legalities. She also received IRS determination letters from Guidant as well that approved the structure, if that helps.

I'm going off of what she told me about all this, but she put this together almost 2 years ago now and she hasn't had any run ins with the IRS yet, so that should be reassuring. I hope this was somewhat helpful for you.

NewBizWoman
05-26-2006, 02:28 PM
Thanks for the info. I've talked with more people as well. What I am able to glean is that it may be completely legit, but is possible only by virtue of a legal loophole. For those that feel comfortable with this, it could be a good option.
But, one must take into serious consideration the $5,000 - $7,000 fee for the service, and determine if this makes sense given the amount of money they are trying to access.
I will probably stick to more conventional means to access the 401k - a loan, distribution (and pay the penalty), or just leave the money there and let it keep working for my retirement. :wink:

novasparker
01-27-2014, 11:03 AM
Wow...I never even knew that this existed. It feels a little like you are cheating, but that's what loopholes are for, right? Cheating the government out of taxes on money we've earned and invested. Anyway...I wish I'd known about this awhile back...but alas, I no longer have a 401(k) account. Good luck with your venture. It sounds exciting.

LindaKay
01-27-2014, 02:43 PM
That's a really smart idea. A much smarter idea than going in debt or paying huge penalties. I think it is important, however, to set up a plan to quickly put funds back into your 401(k). You never know when you might need that money, and it can seem too easy to put off restocking it until "next year."

Other than that, it seems like a wonderful idea to me.

novasparker
01-30-2014, 10:32 AM
I agree with Linda. Make sure that you have a plan in place to get the money back into your 401(k). that money is for your retirement. We often get lulled into the false sense of security...that there is always time to put it back in, but in reality, every day that this money is not in your account is one less day you have to earn interest on it, which has a trickle down effect over time. Put it back as soon as possible and set a deadline for making that happen.

LindaKay
01-30-2014, 11:44 AM
You have to. That happened to my dad. He changed jobs and drained his 401(k). The problem with that was that now he is 50 years old and barely has any retirement savings. It's definitely important to get yourself back on track as quickly as possible.

DarioEM
07-22-2014, 12:38 AM
That's exactly what the investment company I invest with does. With a job that you are still working at you can usually borrow about 30-50% of the total and from a previous employer you can take out 100% of the funds. What kind of business were you thinking of starting or purchasing?

DarioEM
07-22-2014, 12:40 AM
I just realized how old this post is, yikes. Didn't know this forum was that old! 8)

taxcpa
08-08-2014, 12:07 PM
It is something that can be done, but there are a lot of rules and a long list of "prohibited transactions" that will invalidate it. Make sure you follow all the rules. Very important to have an advisor, CPA and or lawyer work with you on this. If done correct, it can work out well.

sjphill
11-18-2014, 04:54 PM
I've been in a PSP&T for 9 years, shepherded there by SDCooper. Be glad to answer any questions you have if I can. I got into it by leaving Corporate America with a large 401K and way too young to consider retirement, and way too stubborn to want to work in Corporate America again. The biggest problem I have is finding a CPA/Attorney who is familiar with this concept, and comfortable with advising me in how to go from C-Class to S-Class. SDCooper are good folks, but sometimes their answers are "generic" for my specific worries. I would strongly advise a PSP&T as a way to get out of CA, but also strongly advise you that the IRS is happy to see your burgeoning corporation benefit your employees, but not so happy if you try to keep the money to yourself.

David T. Breen
11-19-2014, 11:30 PM
One of my family members used Guidant to set up an account. She was very happy with Guidant, and after speaking with Guidant her accountant was on board with the idea. They even paid for her to talk to a third party attorney about the structure. The problem is that most people have never heard about this type of thing, and it scares them. When you talk to your lawyer about something like this they are naturally going to be hesitant, unless they know all the facts. The reason why is that if they give you bad advice you can go back and sue them. My family member had the same concerns, and so she had her accountant talk to Guidant directly as well as talk with the 3rd party attorney. After the accountant learned about the structure, and was able to verify it himself, he felt good about it. I would recommend you doing the same thing with your attorney if you are worried about the legalities. She also received IRS determination letters from Guidant as well that approved the structure, if that helps.

I'm going off of what she told me about all this, but she put this together almost 2 years ago now and she hasn't had any run ins with the IRS yet, so that should be reassuring. I hope this was somewhat helpful for you.
Thanks for the information. your information will be really helpful for all of us trying to buy stock in new business.

uncklefester
01-27-2015, 10:39 PM
why couldn't you just set up a 401k under the existing business structure that allows buying stocks of the company and just roll it into it?

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