Some entrepreneurs are financing a business start-up or business purchase by taking an early distribution from their pension plan or 401(k). However savvy entrepreneurs are doing a rollover of their pension plan into a self-directed 401(k) and end up with almost twice the amount of after tax cash to invest in their business. Here's how it's done.
First remember that the primary goal of Bizar Financing is to finance your business without any of your own cash and leave your retirement money as a safety net for you and your family. However, for those entrepreneurs who still want to use their own retirement cash, the second goal of Bizar Financing is to deny the tax collector and keep as much cash as possible available for your business.
Why take an early distribution from your pension fund or 401(k) and pay up to 45% of the distribution in state and federal income taxes and early distribution penalties when you could do a rollover into a self-directed 401(k) and accomplish the same thing with NO INCOME TAXES and NO PENALTIES?
For example, if you take an early distribution of $250,000, you pay an early distribution penalty of $25,000 and state and federal income taxes of approximately $87,500; leaving you with about $137,500 to finance your business. However, by initiating a self-directed 401(k) plan in either your existing business or a corporation you set up to start a new business (or purchase someone else’s already successful company), your business can sell a relatively small percentage of its own stock to the plan and receive approximately $237,500 in cash financing. (Approximately $12,500 is used to pay the cost to set up this self-directed 401(k) versus losing $112,500 to the government)
Even if you are retirement age and do not have to pay an early distribution penalty, you would still be way ahead by using a rollover into a self-directed 401(k). (Approximately $12,500 is used to pay the cost to set up this self-directed 401(k) versus losing $87,500 to the government in income tax)
The larger the distribution, the more net financing you achieve because the cost to set up the rollover into your self-directed 401(k) does not change.
If you want to set up such a plan, Bizar Financing can assist you with all of the elements within the cost estimate discussed above. Just give us a call at (805) 497-1000 and tell us that you want to rollover your pension account into a self-directed 401(k). We’ll take it from there.
This is just one of dozens of great financial leverage strategies for going into business for yourself that I teach in my online Bizar Financing course. Check out my free online video Getting Rich Your Way and see how other entrepreneurs are using my strategies to start, buy or build their own successful businesses using little or no cash of their own.
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