Use Your Retirement Savings ... to Fund a Startup?

The Wall Street Journal* says that financial planners have developed a method for people to use their 401k or IRA to fund a start-up.

Whether that's a good idea is something we leave to you.

The trick, according to the WSJ, is that the startup must be set up as a C corporation (as opposed to a LLC, partnership, or sole proprietorship). The C corp sets up a corporate retirement account. Then you can roll your 401k or IRA into the new company's plan and invest the money in the new company's stock. Voila! Your money ends up in your startup's bank account.

The company retirement plan could cost $5k to set up and $800 per year (or more, in my experience) in fees. So you'd only do this if it the investment was significant.

The IRS has not approved or disapproved this mechanism, leading "tax experts" to tell the WSJ that this was a grey area. The IRS has approved this type of plan on a case-by-case but has not issued blanket rules.

Would you want to do this? Financial planners generally advocate leaving the retirement money ... for retirement.

Remember Albert Brooks' famous rant to Julie Haggerty in "Lost in America," after she gambled away their savings? "I don't think you understand the nest egg concept."

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