How to Use IRA Funds to Purchase a Business


Starting a business always requires start-up money. For many Americans, their largest source of savings is in qualified retirement accounts such as 401(k)s and IRAs, but these accounts have penalties for taking money out before age 59 1/2. There is, however, a strategy available to use these funds to purchase a business. It's called an entrepreneur rollover stock ownership plan (ERSOP).

Meet with an attorney to incorporate your business and create a profit-sharing ERSOP retirement plan. A qualified business attorney can create the corporation and an ERISA or ERSOP attorney can create the retirement plan and trust.

Establish checking accounts for the corporation and retirement plan trust. Both entities need a regular checking account at a local bank.

Consolidate all funds into the ERSOP. Most people have several 401k or IRA accounts open. You will need to consolidate these via a direct rollover into your newly established ERSOP plan. Call the companies holding the funds and ask them how you roll the money into your new plan. They will either do it over the phone or provide paperwork to complete the transfer.

Issue stock. Now that the ERSOP trust has cash in its checking account, you need to issue stock from the corporation to the ERSOP in exchange for the cash. Once this transaction is complete, your retirement plan owns the stock of your business and your corporation has cash in its checking account.

Use the cash in the corporation's checking account to purchase your business. Even if the business you are buying has an established legal entity, the entire business needs to be owned by the corporation you created.

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