Use TSP goverment funds to finance business startup or purchase

 I am thinking starting/purchasing a franchise business using my retirement fund.  I am currently a federal employee and my retirement fund is in what is called a Thrift Savings Plan (TSP), which is the Federal government’s equivalent of a 401K plan.  I have the following questions before I start the process and hope you can answer these for me.

1.  After setting up the new 401K for the “C” corporation, who holds or has access to the account? The 401k funds are held at Fidelity Investments inside a brokerage account in the name of the 401k. Subsequently, the funds are wired from the brokerage account to the corporation's bank account. We never have access or touch the funds.
 

2.  Does the new business need to be 100% owned by my 401K? No the 401k is not required to own 100% of the business. Often times, the business owner will also invest personal funds into 

the business and thus receives stock in return.
 

3.  My 401K funds may not be enough for 100% of the business.  I may need to take a business loan of $50K to 100K.  Preferably a small business loan.  Is that possible with this type of an arrangements? Yes, whether, an SBA, a bank or seller financing.
 

4.  Do you assist with SBA or other business loans as needed? Yes with respect to providing the lender with all the applicable 401k supporting documents.
 

5.  I will leave about $50K in my 401K after opening the business.  Would I be able to take a loan against this amount if it meets the 401K loan rules for real estate or hardship? Yes the plan allows for 401k participant loans. The participant can borrow 50% of the balance not to exceed $50,000 and the borrowed funds may be used for any purpose.
 

6.  How long does it take from the day I sign the agreement with you to actually have the funds available for investment? It generally takes 10 to 15 business days; however, based on our experience of transferring a TSP using Form TSP-70 (attached) it could take up to 20 business days, but it generally 15 business days.
 

7.  I will have a separate business in addition to this, would it be safe to assume that I can have a separate 401K for this other business as well subject to IRS limitations of what I can put in all 401Ks for myself and my spouse. Yes that is correct. 

More Information

Use Retirement Funds to finance my business

Solo 401k Loan
 

Investing in real estate for income using a 401k

BACKGROUND: I’ll be leaving my current employer and rolling over a 401K program of $180,000. I will likely need to pull some of these funds as a loan to bridge me to next job or until I set up a successful business. I’m planning to invest in real estate for income – rentals and flips, however my understanding is a Solo401K is not a proper vehicle for this.

ANSWER: The ROBS 401k not the solo 401k allows for investing in one's own business. The business activity that you are describing appears to fall under the real estate operating company (REOC) umbrella. I order to qualify for the ROBS 401k, the REOC must satisfy the following requirements.

a. At least 50 percent of the assets of the corporation, valued at cost, must be invested in real estate which is managed or developed and with respect to which such entity has the right to substantially participate directly in the management or development activities.

b. Such entity in the ordinary course of its business must be engaged directly in real estate management or development activities.

Lastly, a 401k participant loan may be taken from the ROBS 401k and the 401k loan funds may be used for any purpose including for paying living expenses.  

Vick in California

More Information

Solo 401k Loan

401k Business Funding FAQs

use 401k to purchase vending machines

QUESTION: I am considering a transfer of 230,000 from my SEP to a solo 401k. I would like to use it to purchase vending machines. These vending machines could possibly generate an annual income of $200,000. Would I be allowed to use the $200 k as income to pay bills, mortgage, vacation, etc?  Thanks. Jason

ANSWER: The 401k business financing retirement plan not the solo 401k allows for the purchase of a business. While the solo 401k is used for investing passively in a business, the 401k business financing retirement plan is used for investing in one’s own business.  Yes the business owner can take a salary based on revenue generated from the 401k funded business. Because the W-2 income is the business owner’s taxable income, he or she may use the W-2 funds for any purpose including paying bills, vacations, etc.

Thanks,

  

Jason in Colorado

Additional Resources
Business Funding FAQs