Over thirty years ago the ERISA Act created IRAs and 401(k) plans to allow investors to control their retirement savings, in contrast to traditional pension plans.
Besides investing in stocks, bonds and mutual funds, tax payers can also use these savings – which are excluded from taxes – toward financing their own business.
Using retirement funds to start up or purchase a business has become more popular since 2001, when the dot-com bubble burst and made stocks less attractive and sent hundreds of downsized executives out looking for something else to do.
Today, more and more taxpayers are cashing in their retirement accounts and placing these funds into a very specific type of trust that provides the beneficiary with the ability to use this money to make an equity contribution in a business in exchange for the trust holding a relatively high percentage of ownership in that business.
These people feel that they can get a greater return on their life savings by investing in their own business and adding in some sweat equity, and end up with a larger nest egg upon retirement.
These trusts are being organized so they can comply with the rules of the Employee Retirement Income Security Act (ERISA) and be classified as a Qualified Trust so they can receive certain benefits under the rules of the Internal Revenue Service.
One of these benefits is that the individual who withdraws his or her retirement money from a recognized tax-exempt retirement plan, like a 401(k), will not be subject to any IRS penalties for early withdrawals.
Another benefit is the opportunity to start a Florida business debt-free by not having to borrowing start up capital and having the burden of note and interest payments. When startup companies are financed with equity from outside sources it can be the most expensive avenue of financing because the company is worth so little.
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