For many years, we believed that in order to access funds in our retirement accounts, we were required to pay taxes on any withdrawal, and—if we were under age 59 1/2—pay an additional 10% penalty. As it turns out, that’s not the case. In fact, it is possible to use retirement funds to buy a business and increase your potential for a happy and comfortable retirement.
A few years ago, some smart person or entity figured out how to break the code, so to speak. Retirement funds can be used pre-tax and without penalties to purchase a business, such as an inn or B&B. The process is relatively simple. On one side, you move your retirement funds into a self-directed 401(k). On the other side you form a C-Corp (regular corporation, not an S-Corp). The 401(k) then buys stock in the corporation, providing the funds necessary for purchase.
Inc. Magazine has a great article on how to finance a business with your 401(k), that does a good job outlining the process, risks and who this strategy is a good fit for.
Despite the fact that the method has helped fund the purchase and start up of literally thousands of small owner-operated businesses (and certainly hundreds of bed & breakfasts and inns among them) it is not an option many prospective innkeepers are aware of. For others there is deeply ingrained belief that retirement funds are untouchable; against all reason that this is an opportunity to enrich one’s life now. The value of the 401(k) does not diminish. It is now held in stock, which will be reconverted to cash funds when you sell an inn, leaving the seller in a good (if not better) position to retire.
How do you determine if this is a good approach for you? Start by looking at your current 401(k) holdings. If you have more than $100,000 in retirement funds, this approach can make it possible for you to purchase an inn or B&B that is larger and more viable as a business that you could otherwise afford. We strongly encourage prospective innkeepers and seasoned entrepreneurs to take a close look at this option. It could change your life, and add an exciting chapter to your career before retirement. If you have questions, or would like more information about using 401(k) funds to purchase a business, contact Bill Oates at bill@innpartners.com.
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