Finance Roll

My neighbor happens to be one of those men that you've always heard of but have never actually seen. He had a great relationship with his wife and two kids until one day, his wife suffered a stroke. He took loving care of his whole family by himself - while he held down a well-paying executive's job at Ford. And then, his parents, he discovered, were getting too old to actually live by themselves. Almost anyone in his position would have thrown up their hands in despair and put their parents up in a nursing home. Not him. He decided that he would quit his job, and actually start a home care franchise on his own. This way, he figured he would be able to take care of his family's growing needs for intimate help, while still staying solvent. He had just one problem. Taking care of 5 people this way for a couple of years, he had spent every last cent of his savings. He needed at least $100,000 in small business financing to set his home care franchise up. How was he going to do it?

Actually, I was able to help him with what some consider to be a novel idea - I told him that he could fund his business by withdrawing as much as $150,000 from his 401(k) account with Ford. I told him that if he did it correctly, he wouldn't even have to pay an early withdrawal penalty.

People do get to doing this for small business financing these days. It's called ROBS to the technically initiated - or ROllover as Business Startup. About one out of six people nearing retirement apply for a ROBS withdrawal each year to fund their business with.

Of course, the IRS isn't completely crazy about this. Your 401(k) has generous tax benefits; when you just go in and raid your retirement account, they feel you might do this to exploit the system. They've decided to scrutinize these applications especially closely these days to make sure that people really do use their retirement withdrawals for what they claim they use them for. If you plan to apply to withdraw your 401(k) for your small business financing needs, you'll find that you stand a chance of getting audited by the IRS.

The good news is though that the IRS almost never finds anything amiss with these audits. Usually, to make sure that everything's done the way the IRS approves of, new business debutantes take the help of a financial services company to handle their 401(k) application and to start their business and everything goes smoothly.

A financial services company would be able to really help the small businessman start off in a professional manner. For instance, in the case of the home care services businessman above, I asked him to start his own corporation, and make it so that his corporation had its own 401(k) plan. He then got the 401(k) money he had at Ford and rolled it over into the 401(k) plan in his new corporation. And then he used that money to invest in shares in that very company. That way, he got his retirement money to fund his new venture. This can be a great way to go about it.