This week, I was reading a USA Today Article on-line article addressing small businesses and the current economy. It caught my eye because it featured Café Boulevard - one of my favorite restaurants in the City of Dayton which has unfortunately fallen on hard times but is still currently open for business. The article discussed how small businesses - specifically small business start-ups - have been the traditional means of assisting in moving our country out of a recession, but, due to the tightness of the credit market, small business start-ups have not been getting the necessary tools to assist in this process. To address this problem, we have seen an increase of people looking to their IRA or old 401(k) accounts as a means to fund a start-up business.
One particular way to tap into your retirement savings to create a small business is called a "rollover as a business start-up." This is where your IRA or old 401(k) balance is rolled over into the start-up company's 401(k) plan and you direct your plan account to invest in the start-up company's stock. This is a particularly interesting means of starting a business since the startup money remains tax deferred and the earnings on the company's stock are not taxed to the entrepreneur until they take a distribution from the 401(k) plan. The IRS is lukewarm to this process and they have issued a memorandum which details the pitfalls they see in this process. For example, the IRS memorandum raised concerns that investment in the start-up company's stock would be discriminatory because it is not available to all participants in the plan. I recently learned in working through one of these transactions that this concern of the IRS can potentially be alleviated if the start-up company's 401(k) plan is drafted so that the company's stock as an investment option is only available with respect to a participant's rollover account - thus only rollover dollars are at risk in the company's stock investment. This is an interesting work-around to one of the IRS' concerns with these vehicles.
This is just one means of using IRA or 401(k) accounts to invest in a start-up business. I am sure that if the credit markets do not support funding small business start-ups, we will be investigating many new and interesting ways of using these retirement dollars as a means to fill the credit gaps.