Thoughts on Using 401K

[Matt Burr]

Every so often I talk to someone who thinks there is a way to structure yourself so you can actually use your 401K. Basically invest your 401k into your own LLC.

I have never been able to find anyone that really has the specifics on how to set this up.

1) Does this actually work and does anyone out there do it?

2) If it works how do you go about setting it up? Head to a lawyer, accountant, or a tax advisor?

Thanks

Matt

[Brian Eastman]

@Matt Burr

A self-directed 401k would not allow you to invest in your own LLC. To keep the tax-sheltered status of an IRA or 401k, all investments must be done at arm's ength.

There is a program known as a Rollover as Business Startus (ROBS Plan) that would allow you to use existing IRA or 401k savings to capitalize your own business. The transaction involves:

• Having your business formed as a C Corporation
• That business establishing a 401(k) plan
• Rolling over an old 401(k) and/or IRA to the new 401(k) plan
• The plan then does an employee stock option purchase of the parent C Corporation

The retirement plan is now a shareholder of your business, and the plan capital can be used in any legitimate business manner, for startup costs, marketing, salaries including your own, etc.

There are no taxes or penalties for using the funds in this way, but the business itself operates in the taxable world, so it is somewhat of a trade off between access and tax sheltering.

It makes sense with significant capital, when the business will be providing a product or service.  This cannot be used to hold rental property, which is passive, and it would be tax-foolish to try and structure that anyway.  For real estate developers or serious flippers, it can be a great tool.