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Using your Retirement Nest Egg as Startup Capital

If you’re over age 50, have substantial assets in your qualified retirement plan, and always dreamed of being your own boss, you are not alone. In fact, you may decide to join the growing number of baby boomers who are tapping their retirement savings for start-up capital on a new business.

The Wall Street Journal, along with SmartMoney, recently discussed the trend, the possibilities, and the potentially dangerous risks involved. Here is the strategy, which the IRS called a Roll Over as Business Startup (ROBS). First, you create a legal corporation with its own 401(k) plan into which you can transfer all of your funds from a previous employer-held plan. With those funds, you can then invest the 401(k) into your new corporation in exchange for shares. What once was simply retirement money has thus become start-up capital.

The problems with this approach are probably obvious: most start-ups fail, but if you fund your start-up with your retirement money then your retirement also goes down the drain. That is probably the biggest risk, but don’t discount the IRS. While this move is legal (if done properly), it does invite IRS scrutiny.

This financing move has become popular enough to draw the attention o f the IRS, which has suggested that these kinds of rollovers “seek to exploit the generous tax benefits enjoyed by qualified retirement plans.” The agency has called for added scrutiny on firms that use them.

Still, some financing firms like Guidant Financial have seen increases in this method (a 30% increase in the case of Guidant Financial, for example). David Nilssen, co-founder of Guidant Financial Group, Inc., says the IRS has never called thse kinds of rollovers non-compliant, only that it would watch firms funded by 401(k) rollovers more closely.

To be sure, there are risks involved. But the profile of an entrepreneur is one of a risk-taker. And then there are other risks at play. Many baby boomers facing retirement simply are not prepared to stop working. That retirement nest egg may not be enough to finance a comfortable retirement, but it just might be enough to finance a second career as an entrepreneur, providing income that could make an eventual retirement that much happier.

There are certainly rewards to a start up, but do not forget to safeguard your home, family and lifesavings.  To learn more about how you can protect your home, family and assets at a free Trust, Estate & Asset Protection workshop.