Self-Invested

Can your retirement savings help solve your financing problems?
This story first appeared in the March 2006 issue of Startups. To receive the magazine, click here to subscribe.

Gaining access to startup capital is often a huge hurdle. Now many entrepreneurs are turning to companies like BeneTrends Inc., Directed Equity and Equity Trust Co. to get early access to retirement savings--without the normal penalties.

How does it work? Len Fischer, founder of San Diego-based BeneTrends, explains his company's four-step process. First, a C corporation is established for the new business, and a retirement plan is then created under the new C corporation. Next, funds are rolled over from the person's existing retirement plan into the C corporation's new retirement plan. Finally, the new retirement plan purchases stock in the C corporation, leaving the capital in the business owner's hands. This process takes about two to four weeks and costs $4,800 plus state filing fees.

Don Patrick, managing director of Integrated Financial Group, a financial planning firm in
Atlanta, offers the following advice to avoid potential problems with this type of financing:

  • Carefully research the company that carries out the process to make sure it's legitimate.
  • Get an IRS letter ruling that documents approval of your individual situation.
  • Operate the C corporation properly, as there's a higher chance of being audited due to both the type of corporation and the type of financing used.
  • Comply with the main principles of the Employee Retirement Income Security Act of 1974.
  • Keep in mind that losses cannot be deducted if the business fails.
  • Employ a team of professionals. "Retain a CPA, an attorney and a financial planner, and let them work as a team," says Patrick. "This is still an area that's [on] the fringe of things."
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