How to use your 401k to buy a business is a five-step procedure with a provider at most of the steps and an accountant at the end. The IRS describes the arrangement as one in which prospective business owners use their retirement funds to pay for business costs through a plan that buys the new corporation's stock. This page walks the five steps in order, says what each produces on paper, and shows where the resulting cash lands in the funding stack on the free calculator on this site.
Steps one and two: the corporation and the plan
Form a C corporation, because the arrangement depends on the plan buying stock in an operating company. Have the corporation adopt a qualified retirement plan with a plan document that permits the plan to hold employer stock. Both steps are paperwork with fees, and the plan document is the one the IRS will read if it ever looks.
Steps three and four: the rollover and the stock purchase
Roll your existing 401(k) into the new plan as a direct rollover, so no distribution occurs. The plan then buys stock in the corporation at a properly appraised value, which is the step the IRS's compliance project found done badly most often. The corporation now holds cash equal to the rolled funds.
Step five: fund the purchase, and keep the plan alive
The corporation uses the cash as the buyer's side of the stack. On the calculator's worked example that is $45,000 of a $450,000 price with the bank at 80% and the seller at 10%, plus $40,000 of working capital and $25,000 of closing costs, $110,000 in all. Afterwards the plan must file its returns, admit eligible employees and value its stock every year; those duties are why the arrangement needs a provider and not just a form.
Questions people ask about how to use your 401k to buy a business
How long do the five steps take?
Weeks rather than days, because the corporation, the plan and the valuation each take time. Start before the letter of intent so the cash is ready at closing.
Can I take a salary from the corporation?
Yes; the corporation employs you. Enter that pay in the calculator so the coverage test is honest.
Does Keysvo keep the plan documents?
Pro keeps them as items against the target, with dates, alongside the lender's and the seller's documents.