Many entrepreneurs are exploiting a tax law loophole by rolling over their 401(k) retirement accounts to help finance their new small business.
Bloomberg reports that the process is complicated, but it allows small business owners to avoid taxes or early withdrawal penalties on the money. Entrepreneurs first work to create a corporation and a retirement account within that corporation. Then, they can roll their old 401(k) into the new retirement program and use the money to buy shares of the new corporation, giving them capital for their startups.
“When you start comparing it with a 15 to 20 percent interest rate on a loan … people are saying ‘I’d rather be my own investor,’ ” Jeremy Ames, chief executive of Guidant Financial Group, told the news provider.
While the rollover loophole is not a new discovery, Bloomberg says it has gained new popularity in the last few years as some small business owners have had difficulty finding credit.
The Wall Street Journal reports that the strategy also carries additional risks tied into the success of the business. If an entrepreneur puts his or her retirement savings into a company and the company fails, the retirement fund “can be wiped out.”