From Tax Tables to Startup Success
From Tax Tables to Startup Success
A case study for startup financing
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Newsletter rundown:
U.S. Federal Tax Deadline
How You Can Use Retirement Funds to Buy a Business
How it Works
Final Word
U.S. Federal Tax Deadline
The federal tax code comprises 74,608 pages. If you can't find a page tailored to your needs, you're not utilizing it effectively.
This is why hiring a financial advisor is important for high earning professionals.
Any surprises on April 15th could end up costing you thousands of dollars.
Based on reader feedback, today’s newsletter will cover a real life case study to help you apply the tax code the right way and make informed investment decisions.
How You Can Use Retirement Funds to Buy a Business
Did you know your 401(k) can be used before retirement to invest in a start up—tax and penalty free?
Invest in yourself, not Wall Street.
This might appeal to investors who:
Have large retirement balances ($250,000+)
Interested in running a start up business
Interested in owning a franchise
Considering a career change
The ROBS (Rollover Business Start-Up) solution is an IRS approved structure that allows investors to use retirement funds to invest in a new business or franchise that they will personally be involved in. IRS Source
It is an alternative form of business financing that can be used without having to borrow the cash to start, acquire, or grow a business. It is one way that a retirement plan holder can have personal involvement in a business with their retirement funds without triggering the IRS prohibited transaction rules.
The second way is a Solo 401(k) non-recourse loan.
The Solo 401(k) loan allows an investor to borrow $50,000 or 50% of your account value, whichever is less.
Both options have specific rules behind the type of investment, the transaction itself, and the structure of the business.
Personally we find that ROBS maybe the best solution for retirement fund investors who want to:
Invest in themselves
Earn a salary and be involved in a start-up business
Diversify their investments
Save money by not taking early taxable distributions
This type of structure does not come without risks.
If done incorrectly, you may unknowingly create a taxable distribution that is subject to a 100% penalty and may disqualify your retirement account.
This is why its important to work with a professional who drafts a favorable determination letter as a way to assure their clients the IRS approves the ROBS arrangement.
How it Works
Establish a C-Corp
Roll Over Funds
Start Earning a Salary
Draft a Determination Letter
Establish a C-Corp
The ROBS Solution requires you to establish a C corporation in the state you plan to operate the business. “C corporation” is the business term for this type of entity. The C corporation will pay an annual tax and is given an exemption from the IRS retirement prohibited transaction rules.
Roll Over Funds
Next you’ll have to roll over your funds from an old IRA or 401(k) plan to purchase stock in your new 401(k) plan in the name of the start-up C corporation.
Typically a minimum of $50,000 or more is needed to rollover and fund your new business.
It is at this time that the IRS requires an independent valuation of the new company’s stock.
After the independent valuation, the C corporation can use the rollover proceeds from the sale of stock to purchase assets for your new business.
Start Earning a Salary
According to IRS rules, you must be an employee of your new business and provide a legitimate service.
You cannot earn compensation income before the company actively engages in a trade or business.
Your compensation must be derived from your business operations.
In addition, the compensation you earn from your business must be “reasonable.”
Draft a Determination Letter
In the past, the IRS has voiced concerns that the ROBS structure can be abused.
The best way to avoid any tax penalties is to get the green light by having a professional draft a determination letter.
After submitting your application for a determination letter, you will receive an acknowledgement notice, which means the IRS has received your application. After it has been assigned, an employee plans specialist will contact you and provide all the necessary information to ensure your investment is legitimate.
Final Word
Thank you for reading and I am grateful and humbled to be able to learn, grow, and invest alongside you at Tuttle Ventures.
Vision, courage, and patience leads to successful investing.
Don’t forget to follow Tuttle Ventures on Twitter, LinkedIn, or Instagram.
Check out the website or some other work here.
Best,
Darin Tuttle, CFA
This is not investment advice. Do your own due diligence. Past performance is no guarantee of future results. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Investors are encouraged to perform due diligence, consider their risk tolerance, investment goals, and consult with financial advisors before making investment decisions. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
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