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Very few
investors/entrepreneurs realize that they have the ability to finance the
purchase of a business with retirement funds. Most people believe that
there are only two options available to them if they want or need to access
capital from their plan/s, namely, either borrowing from the account or
withdrawing some portion of the assets. Borrowing involves repaying the
principal and interest and a withdrawal may be subject to a pre-distribution
tax and penalties. There is another way…
The Employee
Retirement Income Security Act (ERISA), which created the IRA in 1974,
places surprisingly few restrictions on how retirement money can be
invested. Except for life insurance or collectibles—such as artwork or
coins—IRA funds can be placed in just about anything. Tens of thousands of
investors have switched their retirement savings to self-directed accounts
since the stock market correction of 2000 and 2001. By some estimates, 3% of
the $3.5 trillion held in IRAs is now in alternative investments—and the
number is growing.
Retirement
Account Facilitators have become expert at structuring self-directed
accounts and streamlining the once-onerous paperwork. A Facilitator can
create a C Corporation that allows you to purchase a business or franchise
with retirement funds. They will form either a new self-directed IRA or a
new 401(k) and roll over your existing 401(k)/IRA funds into the newly
formed plan and manage the plan going forward.
Here is how it
works… A new C Corporation will be formed and will sponsor a new 401(k).
Your retirement funds are rolled into this new 401(k) and the retirement
monies will invest in the stock of the new C Corporation giving the
Corporation the cash to purchase the inn. The new retirement account
invests directly into your new C Corp. by purchasing as much as 95% of its
stock, providing the necessary capital to fund the down payment or as much
as 95% of the entire purchase. Your new retirement account actually
purchases the stock of a company you control, much as if your IRA or 401(k)
were to purchase shares in a publicly traded company. Here are the
benefits… when you purchase an inn with this type of structure you do not
re-pay a loan which adds to overhead and you will not incur penalties and
taxes due to a distribution – it is a stock investment. Profits can flow
into your retirement account and can be sheltered proportionate to how much
stock it owns in the corporation. Ultimately, once you sell the inn, any
gain from the sale of the sale will be tax deferred in the same way as the
profit. The accumulated tax deferred profits and the gain from the sale,
are now available for re-investment.
Custodians don’t
offer investment advice—that’s the self-directed part. No outsider can
guarantee the soundness of your investment strategy and that can be as
terrifying as it is liberating. As always, talking with a good financial
advisor who is knowledgeable in your area of interest is important. Unless
you have both time and capital to spare, you should be cautious before
putting your entire nest egg into a new business. However, investors with a
strong do-it-yourself streak and a compelling alternative investment
strategy may want to consider joining the growing ranks of people who have
decided to invest their retirement funds in themselves.
Note: The material contained in this overview is provided for your general
information and should not be acted upon without prior professional
consultation with the appropriate experts.
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The B&B Team, Inc.
Inn Consultants and Brokers Since 1993
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Licensed in Virginia, West Virginia, North Carolina, Maryland, and Maine
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SCHERMAN ~
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ME 04043 ~ 207-967-1995
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