With help, you can use your 401(k), 403 (b), IRA rollover or other retirement plan as capital to purchase a business while preserving your tax deferral and not triggering a tax penalty. These transactions are clearly within the letter of the law as spelled out in the Employee Retirement Income Security Act of 1974 (ERISA).
The IRS has established numerous rules to keep future retirees from spending the funds held in trust today and awaiting them at retirement. Premature distributions are penalized and taxed as ordinary income—resulting in a typical net of about only 50¢ on a $1. Certain provisions of ERISA provide a way to legally move money locked in 401(k) or other IRA rollover accounts directly into a new or established business without distributions, taxes, penalties or the use of loans. Your personal finances can remain intact while you acquire a business that might otherwise be beyond your financial grasp.
Our service provider charges a flat fee of $4,000 including a Letter of Determination from the IRS. The plan can then be maintained for $800 per year. As the business succeeds, this annual charge provides the ongoing upkeep of this specially designed retirement plan for as long as you own the business. Our service provider does not sell investments.
Rollover Steps
The Corporation
You will need to incorporate. This can be handled by our service provider, your attorney or you (not recommended). Buyers forming an Illinois corporation are urged to consider the IL Secretary of State’s $300 expediting fee to avoid unreasonable delay.
The Process
Our service provider will prepare the documents with special language to establish your new Profit Sharing 401(k) Plan and Trust. With your new plan documents, corporate resolutions, and Tax Identification Number, your bank will open a checking account for your new “Plan.” The “Plan” is submitted to the IRS for a determination letter. There is a $700 filing fee that may be waived if there is at least one highly compensated employee (non-owner).
The Rollover
In order to be eligible for a rollover from your last employer’s retirement plan, you must have terminated employment with that employer. You are assisted in preparing any forms to secure the “direct rollover” of your retirement assets into your new Profit Sharing Plan & Trust checking account. You, as trustee, will transfer funds from the Profit Sharing Plan and Trust account to the corporate account. Your new corporation will issue share of its stock to the Profit Sharing Plan & Trust. The corporation will now have the cash and the Profit Sharing Plan & Trust will own the corporation’s stock.
Annually
The Plan will require administration, allocations, trust accounting and federal government reporting every year for an $800+ annual fee. Each corporate year-end, our service provider will estimate the tax-deductible contributions that you can make to your new tax-deductible retirement plan.
