Using a 401(k) to Fund a Startup – CAUTION

With the credit crisis, rolling over a 401(k) to fund a startup business is becoming an attractive

The proper procedure requires the entrepreneur to create a new entity with its own 401(k) plan and roll over existing 401(k) funds into the new plan.  The new 401(k) money is then used to buy shares in the new company, providing much-needed capital for a startup.  Without the rollover, the money would be subject to income taxes.

Upon closer examination, the IRS is finding that business owners push the envelope – fudging the valuation of the company’s shares, or not using the 401(k) money for business expenses.

Like everyone else, the IRS is hurting financially and it seems that small businesses are its focus.  We’re like the person walking past the panhandler claiming we have no money while coins jingle in our pockets.  The IRS is not above turning us upside down and shaking us until all the change falls out.

If you are considering rolling over your 401(k) to fund a startup, be sure you follow the rules.  Insist that your financial advisor and your CPA communicate with each other, because if you get audited, it’s your keester in the fire.