BACKGROUND: Ed, I am certainly not an expert so what I am telling you
is just what I think. If you cash in your 401(K) I believe you will be
responsible for paying the federal income tax on everything you withdraw from
that account. In fact, I believe it is a required withholding when the
funds are disbursed to you. This will be at whatever tax rate you fall
into. You will not be liable for any penalty though, because you are over
59-1/2 years of age. If you feel that you could get a better return by
investing in a business, it might be okay but you should know that the taxes
will be withheld when the check is issued to you. Whoever this person is
that you are dealing with should certainly be up front about the tax
consequences of withdrawing from your retirement account. Another way of
looking at it is that regardless, you will have to pay taxes on it one day when
you start using the money for this or any other purpose because all of your
contributions to the 401(K) (and those that CPH made for you) were made on a
pre-tax basis. You should discuss the tax consequences with him and then
make your decision. You might also want to check with a CPA (like Greene
and Dycus) - the company that CPH has worked with all these years. I can
get you their contact information if you need to consult with them.
ANSWER 1) The tax consequences that your
friend is describing do not apply to our 401k Business Financing plan, referred
by the IRS as ROBS 401k (rollover as business startup). Your friend is
describing the tax consequences that would apply if you decided to withdraw the
funds from your retirement account. Specifically, if you simply withdraw
the funds from your retirement account, the amount will be considered income
and subject to income tax (note: it would be also be subject to a 10% penalty
if you were under 59.5 years old). Our 401k Business Financing plan does not entail
withdrawing the funds from your retirement account. As a result, you will
not incur taxes/penalties. Rather than withdrawing the funds, our plan
entails investing your retirement funds in your business via a 401k which
allows you to invest your retirement funds in your business without paying
taxes/penalties. Our plan is an IRS-approved plan and moreover the IRS
has recognized this strategy as a legitimate means to invest your retirement
funds and fund your own business.
ANSWER 2)
You state below that you "could
avoid paying taxes on the 401 K until selling such business." In
fact, merely selling the business will not trigger a tax obligation
with respect to your 401k investment in the business. As noted
above, the strategy entails investing your retirement funds in your business
via a 401k. Specifically, you will hold stock in your business via a
401k. If you sell the business, any gains with respect to this stock will
remain in the 401k. This is similar to any other stock (e.g., Ford Motor
Company stock, Home Deopot stock, etc.) that you might hold in your 401k and
then sell where the gains remain in your 401k on a tax-deferred basis.
These amounts will not be subject to taxes until you withdraw the funds from
the 401k.
Lastly, to learn more about what the IRS says about using one's retirement funds to finance his or her own business, click here.
