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How and Why to Invest Your Retirement Funds in Yourself

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Self-Direct Your 401(k) to Finance Your Home Business

You’re thinking of starting a home business, or growing the one you already have, and you (rightly) dislike the idea of getting a bank or SBA loan, even if you could qualify for one. Debt is a lousy way to start a business; it cripples cash flow and delays how long it takes for you to be profitable. But there is another way to finance your home business, although it’s not well-known. You could even call it a secret weapon of the mid-career entrepreneur who decides to invest in him/herself.

The Self-Directed 401(k) is that secret weapon – a financing option that lets you invest your retirement dollars into You, Inc., without taxes or other penalties. Many successful entrepreneurs have used the Self-Directed 401(k), also known as Rollover as Business Startup, to get them started and to boost growth. The strategy also works for IRA, SEP, SIMPLE, 403b, 457 or other eligible retirement plans.

Man with a Van

Dan Murphy, of Syracuse, NY, hadn’t heard about the concept of Self-Directed 401(k) until he was chatting with other owners of the CertaPro Painters franchise he was considering buying. When he decided to make the purchase, after being downsized from his corporate job, Dan rolled over about 60 percent of  401(k) dollars, accrued during his long career, to invest in his own business.

Dan is in a business model known in franchising as “man with a van.” His office today is his SUV, vinyl-wrapped in CertaPro Painter logos, visiting customers and prospects, and doing the bookkeeping at his family home. He does everything by himself except the actual house painting. (He hires local crews for that.) In his second year of entrepreneurship, Dan did another rollover of his 401(k) funds to further business growth. Dan’s advice—which he’s heard echoed by other entrepreneurs—is that “once the business gets into a position where you can start paying the 401(k) funds back, make sure you actually do that, so you can convert the funds back into 401(k) status.” He’s referring to the desired element of setting up of a retirement plan for any employees you take on in your new business, including your spouse, if desired.

Roping a Dream Job

Dave Petty, of Chelsea, OK, launched his startup entirely without debt—through the rollover of his substantial 401(k) he earned in decades as an oil industry executive, into his own corporation, Double Rafter D Enterprises, Inc.  “I worked hard to accumulate what I had,” says Dave. “I’m confident in the business we’re doing, that we can make more money each year than in the stock market.” That business is the provision of video-recording and instant-replay electronic-scoreboard services to professional rodeos across the U.S. He and his wife, Dawn, work together as the only employees of their start-up. They, too, have an office-on-wheels, in their case a pickup truck and specialized trailer with pop-up scoreboard. A large capital injection was needed when the Pettys realized how much more business they could book if they instead automated the long, manually intensive setup/tear down of their scoreboards. The new equipment, including a video tower, required about $200,000, which they got by rolling over Dave’s 401(k). It’s paid off quickly, he says. “It’s taken our business to a new level” of success.

Growth of a Pickle Legacy

Mark and Tracey Olenick were happily pickling at home, four young kids underfoot, when two things happened: demand for their pickles expanded beyond family and friends, and Mark got a pacemaker, at age 43, and began reconsidering his life’s work. They decided to open Lititz Pickle Company, named after their hometown in Pennsylvania, and quickly outgrew their kitchen. The local commercial space they leased was soon undersized, and the couple moved across state to the town of Venango where they bought an old general store and a couple land parcels.

Drawing on her accounting background, Tracey led the business while Mark kept his corporate manager job at a investment firm (working nights and weekends at the pickle business.) Five years in, Mark made the leap to full-time work at Luke’s Cukes, as the company was renamed (after their son Luke’s pickle passion). Mark rolled over the 401(k) from his 19 year career, providing much needed capital, enabling the Olenicks to renovate the general store to a cafe, retail, and production facility, and upgrade their pickling equipment. The company is a family affair, with all the work done by the couple and their now teenage kids, although that may soon change as they diversify their corporation by adding an outfitters business on the riverfront lot they own.

Moms Stock Vending Machines

Amy Shellart, of Springfield, MO, merged her personal passion for healthy living with her experience working in chronic disease management, focused mostly on the design and maintenance of diabetes programs. At age 41, when Amy started working out at the gym, she “had to walk by a vending machine with Coke, sticky buns and chocolate bars to get to the fitness machines,” she recalls. “I saw the same thing in hospitals—bad vending! Where are you supposed to get healthy foods in these places?” And so The Goodness Locker, Inc., which provides natural food vending machines, was born.

Amy’s life partner, Christina, who is a stay-at-home mom, works full time on the startup, along with help from their two preteens who do taste-testing and shopping for the local food and drinks for the 10 Naturals2Go vending machines the couple bought. While Christina pitches local businesses to take on their machines, Amy has, for now, kept her corporate career going.

In her pre-launch research, Amy had asked a supplier how he funded his purchase of the vending machines, and he told her about the Self-Directed 401(k) option. “It was a big surprise to me, but it made sense right away,” says Amy. Working with 401(k) rollover experts, she put about half her retirement funds into a new corporation to start the Goodness Locker Inc. “Self-directed 401k was a big leap for me,” Amy admits, but worth it because she didn’t like the other options. “I have really good credit, but I didn’t want a business loan,” she says. “I’d heard what an ordeal it is to get a SBA loan.”

Not a DIY Venture

While the entrepreneurs in this article are very small companies, one person or a couple based out of their home/vehicle, the Self-Directed 401(k) option has been successfully used by owners of medium to large-sized businesses, of all kinds – franchising, startups, purchases of existing businesses, across all sectors. There is a growing profile of this financing option for small businesses,

Self-Directed 401(k) is definitely not a DIY type of program. Like most things involving the government, there’s much red tape and paperwork required, and you don’t want to get on the wrong side of the IRS. It’s advisable to work with a retirement plan specialist who has a tried-and-true program set up to lead you through incorporation, rollover of the funds, and ongoing administrative and compliance requirements. Done carefully, this fully legal financing option, which is allowed by the federal government to support small businesses, is an excellent way to make the leap to entrepreneurship while clearing the hurdle of debt.

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