October 31, 2020  
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Using Retirement Savings For Startups Brings IRS Scrutiny

Written by Jenna Weiner
Published: 6/23/2010

Small business owners who use their retirement savings to start a company are facing increased scrutiny from the IRS.

While many small business owners are having trouble getting a bank loan to finance their small business idea, others are using their 401(k) retirement savings to get capital for their companies. But the worrisome news for entrepreneurs is that the practice has brought renewed attention from the IRS, according to Bloomberg.

Entrepreneur Mixed Financial Results

To begin the process, the business owner first starts a new corporation and creates a retirement account for the new business. Then, a broker rolls the old 401(k) into the new plan, allowing the entrepreneur to use the money to buy stock in his or her own company, and raise capital without paying income taxes or early withdrawal fees.

While the process itself is legitimate, Bloomberg says that some people have abused the system and used the money from the stock sales to buy personal assets such as recreational vehicles.

"We are seeing problems," Monika Templeman, acting director of employee plans at the IRS, told the news service. "It is open to abuse."

Early withdrawal penalties can be a significant deterrent. The IRS says that any withdrawals made from retirement accounts before the age of 59 1/2 are generally subject to a 10 percent tax.

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