Finding the funds to get your start up business off the ground is one of the – if not the – biggest challenge faced by the want-to-be entrepreneur.Credit is still tight as the economy is not bouncing back the way it was supposed to, so it might be tempting for someone to think about dipping into their retirement fund or 401K to get the money they need. But is that really worth the gamble?
It all sounds very easy in theory .By rolling your retirement fund into your start up business you pay no income taxes or early withdrawal penalties, avoid debt and have money available immediately to rent a space, pay a franchise fee, hire employees, buy equipment and pay yourself a salary, all of it legal thanks to certain sections of the tax code.
For some startups this indeed does work very well. Accordingto FRANdata, which is an independent market research firm, over 4,000 new businesses were born in this way in 2009 alone, everything from fast food franchises to flower shops.
However, this route to business independence is not as easy as the brokers who advocate it make it sound. There is of course the obvious danger – that you are putting your nest egg on the line, a big gamble in itself– but you also have to agree to pay the rollover plan provider an annual fee for the entire life of your business. Some say that you will also potentially face extra scrutiny from the IRS, as although few rollover plans have been questioned until now, the IRS has indicated that it may indeed begin looking at them more closely.
Right now though although some financial experts believe they are operating in a gray area, working with a company offering a retirement rollover plan like this is legal and above board. They can work, businesses have been started and become highly profitable, enabling their owners to build an even larger nest egg than they had before.
In the end it all comes down to the biggest risk a startup business owner has to face – will this business succeed?And as we all know, no one can answer that question with certainty when they set up shop.
