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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Can I use my 401k money to start a business without being taxed

Customer Question

Can I use my 401k money to start a business without being taxed or penalize. Need money to purchase a gas station.
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

LEV :

Hi and welcome to Just Answer!
To avoid distribution from your 401k account - you may rollover funds into a IRA account - you might be able to use so-called "self-directed IRA."
According to IRS regulations the IRA owner is a "disqualified person" and cannot directly or indirectly buy, sell, or use the IRA funds.
You may create a separate business entity (LLC or corporation) that would purchase the property. That entity would act as holding company for the IRA property. While you may be a manager of the LLC - you may not receive unreasonable compensation for that - IRA funds should not be mixed with any other funds or property you own. All income and expenses should be done through LLC bank account and with approval of the trustee.

LEV :

In this case all income received in your IRA account will be deferred upon distribution. If the IRA account "owns" your LLC - LLC income will be passed through to the IRA.
Please be aware that when you eventually take a distribution - it will be your taxable income. But as long as funds are inside the IRA - the tax liability is deferred.
What you might need - to find the administrator of your IRA who allows self-directed IRA structure - not all administrators allow that. You may also expect to pay some fees - so verify that overhead would not be too large for your investing.
Generally - self-directed IRA works as following:
You open IRA account with the custodial who allows self-directed IRA option and rollover funds from your 401k plan to that IRA..
Your register an LLC which is owned by the IRA.
Funds from the IRA are used to fund that LLC.
The LLC purchases real estate and other business assets which are titled to the LLC.
The LLC accumulates income realized from business and other investment activities.
Because the LLC is a disregarded entity - it doesn't file the tax return - and all income is passed through to the owner - in this example - to your IRA.

LEV :

There are some limitations. You may not combine your own money and funds from your IRA to purchase a property
You also may not use a property held in the IRA as a collateral for the loan. If your IRA has 200k - you may use only that amount.
Here is a List of Self Directed IRA Custodians - http://www.thehardmoneypros.com/self_directed_ira_custodians.shtm You may call and ask what fees they charge.
Here is a nice discussion how to choose the custodian for your self-directed IRA - http://www.biggerpockets.com/forums/51/topics/58063-who-is-your-self-directed-ira-custodian-of-choice-why-

LEV :

Please be sure you ask for clarification as needed.
My goal is to provide EXCELLENT service for your satisfaction.

Expert:  Lev replied 4 years ago.

Hi and welcome to Just Answer!
To avoid distribution from your 401k account - you may rollover funds into a IRA account - you might be able to use so-called "self-directed IRA."
According to IRS regulations the IRA owner is a "disqualified person" and cannot directly or indirectly buy, sell, or use the IRA funds.
You may create a separate business entity (LLC or corporation) that would purchase the property. That entity would act as holding company for the IRA property. While you may be a manager of the LLC - you may not receive unreasonable compensation for that - IRA funds should not be mixed with any other funds or property you own. All income and expenses should be done through LLC bank account and with approval of the trustee.

LEV :

In this case all income received in your IRA account will be deferred upon distribution. If the IRA account "owns" your LLC - LLC income will be passed through to the IRA.
Please be aware that when you eventually take a distribution - it will be your taxable income. But as long as funds are inside the IRA - the tax liability is deferred.
What you might need - to find the administrator of your IRA who allows self-directed IRA structure - not all administrators allow that. You may also expect to pay some fees - so verify that overhead would not be too large for your investing.
Generally - self-directed IRA works as following:
You open IRA account with the custodial who allows self-directed IRA option and rollover funds from your 401k plan to that IRA..
Your register an LLC which is owned by the IRA.
Funds from the IRA are used to fund that LLC.
The LLC purchases real estate and other business assets which are titled to the LLC.
The LLC accumulates income realized from business and other investment activities.
Because the LLC is a disregarded entity - it doesn't file the tax return - and all income is passed through to the owner - in this example - to your IRA.

LEV :

There are some limitations. You may not combine your own money and funds from your IRA to purchase a property
You also may not use a property held in the IRA as a collateral for the loan. If your IRA has 200k - you may use only that amount.
Here is a List of Self Directed IRA Custodians - http://www.thehardmoneypros.com/self_directed_ira_custodians.shtm You may call and ask what fees they charge.
Here is a nice discussion how to choose the custodian for your self-directed IRA - http://www.biggerpockets.com/forums/51/topics/58063-who-is-your-self-directed-ira-custodian-of-choice-why-

LEV :

Please be sure you ask for clarification as needed.
My goal is to provide EXCELLENT service for your satisfaction.