YOU CAN FUND YOUR BUSINESS WITH YOUR RETIREMENT PLAN.
In 1974 everything changed. A new law known as ERISA, the Employee Retirement Income Security Act, was passed by Congress. Prior to 1974 saving for retirement was the responsibility of employers, after, the responsibility of the employees. Most pensions were closed and new plans like 401(k) and IRA savings accounts rose up. Suddenly, the average person had the responsibility to learn how to save and invest for retirement and many were overwhelmed by the responsibility.
Wall Street saw an opportunity. New clients! Clients who were not the professional money managers who ran pension plans, but people eager to learn and fearful to fail. To the point: in 1970 there were only 360 mutual funds in America ¹, by the start of 2012 there were over 14,000 mutual funds accounting for more than 23% of American household wealth². Wall Street did a very good job of making their products accessible and understandable for every American.
“What does this have to do with funding a business with retirement money?” you may be asking. Wall Street’s success in making their products synonymous with retirement saving had the impact of burying much of what ERISA empowered Americans to do with our new-found power to direct our own investments. In fact, the post-1974 American is capable to make almost any investment that a pension plan could invest make prior to ERISA. It just takes the right plan.
One of those powers is the capacity to use retirement saving to fund a private business, one that you will run, without having to pay taxes on the retirement money first. You can hold the stock of your own business inside of your retirement plan. As your business grows, so too will that part of your portfolio. When you sell your business, the profits go into your retirement plan with no taxes or penalties to pay. If you business fails, you have no debt to repay, no credit crunch, no taxes due and your loss is treated the same as any stock loss in your retirement account – no penalties.
This provision – the ability to grow your retirement plan by investing it in your business – was largely ignored until about 2000. There is some evidence of lawyers and their clients taking advantage of this law as early as 1978, but no organized promotional efforts are evidenced until the last 1990’s or early 2000’s. In fact, it may be that mass communication via the Internet is the only reason this technique came to be broadly used. To date we estimate that about 150,000 businesses have been funded using retirement funds. A big number in just 10-15 years. Still, the SBA estimates 600,000 new businesses are started each year³, so this funding model remains a niche.
As a niche funding program, there are very few lawyers or CPAs who are familiar with these laws. Add that most lawyers and CPAs find areas of specialty to focus on and the full expertise to manage this law eludes even those that are aware of it. This leaves the companies that market and profit on the sale of 401(k) business financing programs as the exclusive source for information available to entrepreneurs considering this plan.
This website is NOT affiliated or otherwise connected to any 401(k) Business Funding sales organization. Our Authors are former – and current – shareholders, executives and employees of 401(k) Business Funding. We are 401k Financing Insiders.
¹. Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford University Press. Page 63
². The Investment Company Institute. www.ici.org