3 Ways to Use Retirement Funds to Rescue Your Business
The economic impact of the Coronavirus pandemic and resulting social distancing measures taken to protect lives and slow the spread of the disease have been catastrophic for small businesses across the country. There is no doubt on that point.
Even as rules start to relax and economies start to open back up, it is equally certain that any economic rebound will be slow and take place in fits and starts. For many businesses, “back to normal” may be a long way off, if ever. Some enterprises will need to re-design and re-think their operating model to accommodate what may become a “new normal” of social distancing.
The businesses that will make it through these challenging times and have the ability to adapt to a different future will be the ones with capital. But where can one find capital in this environment?
There are three ways you can potentially tap into tax-sheltered retirement savings without penalty. Let’s take a look at the pros and cons of each.
Expanded 401(k) Loan
As part of the CARES Act passed in March, the participant loan provision of most qualified employer plans was increased to $100,000. The previous limit was the lesser of $50,000 or 50% of the account value. For a saver with $80,000 in their 401(k) or similar plan, that meant a maximum loan of $40,000.
In addition to bumping the limit, 100% of vested savings may be borrowed under these special provisions that apply to loans taken between March 27, 2020 and September 23rd, 2020. A person with $80,000 of vested balance in their plan can borrow the full amount. Someone with $100,000 or more in their plan can borrow up to the maximum of $100,000.
This loan provision is available from any 401(k) or similar employer retirement plan you may have that is associated with current employment – whether that is perhaps a Solo 401(k) sponsored by your own business or a plan associated with another company you work for in addition to running your own business.
Interest rates are established by the plan sponsor and are typically in the range of Prime rate plus 1 – 3 percent.
Plan loans are for a 5-year term. For Coronavirus loans, payments are deferred until 2021 and the 5-year clock starts then as well. Interest will accrue in 2020, but that is interest you are paying back to your own retirement plan.
If you leave or lose the job associated with the 401(k) plan you borrow from, the loan must be repaid in full by the tax filing date (including extensions) of the tax year in which termination occurs. Some plans may have more generous terms for repaying a loan after separation from service, so check with your plan provider. Taking a loan from a job that may not be stable is therefore not a good idea.
Pros:
- There are no taxes or penalties associated with a 401(k) loan.
- No approval required, so long as your plan offers a loan provision.
- Paying Interest to yourself.
Cons:
- Opportunity cost. The plan could potentially make more money in investments than the interest on the loan.
- Risk of termination and need for short-term repayment of the loan.
- Loan amount is considered a distribution with taxes and any applicable early distribution penalties if not repaid according to the terms.
Coronavirus-Related Distribution
The CARES act allows eligible participants in a variety of 401(k) and IRA type retirement plans to take an early distribution of up to $100,000 during the 2020 calendar year. The normal 10% penalty for early distribution prior to age 59 ½ is waived for these special Coronavirus-Related Distributions (CRDs)
In order to be eligible for a CRD you must have a qualifying hardship associated with the COVID-19 pandemic. Conditions include:
- Have been diagnosed with COVID-19
- A spouse or dependent has been diagnosed with COVID-19
- Are experiencing financial difficulty as a result of being laid off, furloughed, having work hours reduced, or by being quarantined
- Are unable to work because of a loss of childcare as a result of COVID-19
- Own a business that has closed or is operating under reduced hours
- Meet other criteria as determined by the IRS
The $100,000 limit is per individual and may be taken from one or more eligible retirement plans.
Not all qualified employer plans are required to offer such hardship provisions, but the general feeling is that a majority of employers will. Be sure to check with your plan administrator.
In addition to the waiver of early distribution penalties, there are some other features of the CRD program that make this a workable alternative to access capital without necessarily putting a big long-term dent in your retirement savings.
Distributions from a 401(k) or similar employer plan are not subject to the normal 20% tax withholding.
The taxes on the distribution may be paid over a 3-year period of 2020, 2021 & 2022. Alternately, you can choose to pay the taxes in full in the first year. Paying in year one would be the better option if you intend to re-contribute the funds.
During the 3-year period beginning with the date of a CRD, you can re-contribute funds back into your retirement plan and are not limited to normal contribution limit amounts. Such re-contributions are treated like an indirect rollover, but without the 60-day limit and requirement of one such transaction per 12-month period.
Rollovers may be done in one payment or with several contribution transactions over the 3-year period.
Any rollovers that occur after payment of taxes and a tax return will require filing an amended tax return to have the taxes paid refunded. As such, it may be best to pay taxes in year one to minimize the number of amended returns that may be required.
If you have access to a 401(k) loan from a stable job, that is likely a simpler and more direct option. Using a CRD would be appropriate for individuals who do not have an active 401(k) from which to take a loan, or if they may already have an outstanding loan balance that limits the amount of new borrowing available. The CRD may also be the better option if the employment associated with a 401(k) may be at risk.
Pros:
- If the distributed amount is rolled over back into your retirement plan, there are no taxes.
- If the distributed amount is not rolled over, the tax implications are less than would normally occur with an early distribution, and you have 3 years to pay the taxes.
- Available to all plan participants, not only those with an active 401(k) plan.
Cons:
- Must have qualifying conditions for the distribution.
- Need to pay taxes on the distributed amount unless rolled over in 2020.
- Need to amend tax returns to reclaim taxes paid.
Rollover as Business Startup
You can use eligible tax-deferred retirement savings to directly invest in your own business with no limit on the amount and no taxes or penalties. To accomplish this, a strategy we call a Business Funding IRA is used.
As with the rebound period after the great recession of 2008, we expect a surge in the use of this special vehicle in coming years as more and more investors decide to tap retirement savings to start, salvage, or grow their own business.
The concept is often referred to as a Rollover as Business Startup or ROBS plan but is not just for startups. The plan can be applied to both new and existing business ventures. The ROBS structure works as follows:
- The operating business must be a sub-chapter C corporation. If the business is currently in another format, it must change to this entity type.
- The business establishes either a profit sharing or 401(k) style retirement plan, depending on which is more suitable to the situation at hand.
- As an employee/owner of the business, you can rollover funds from a prior employer tax-deferred 401(k), IRA or similar plan.
- The company retirement plan then purchases shares of the parent corporation using an employee stock option purchase (ESOP).
- The plan is now a shareholder of the business, and the plan capital is available to the business for startup, expansion, or other legitimate business capital needs. You can even pay yourself a salary.
There are no taxes associated with this strategy.
There is no limit on the amount of funds you can rollover, so it becomes possible to tap much more than the $100,000 cap associated with a participant loan or CRD.
Because of the administrative infrastructure required for this plan, we do not recommend this solution for rollover amounts of less than $100,000.
Pros:
- A means to invest in yourself.
- No cap on the amount of funding available.
- No need to repay in either 3 or 5 years as with the other options.
- Funds can be used for any legitimate business purpose.
Cons:
- A more complex solution only suitable for larger capital amounts.
- Cannot access a current employer 401(k) for rollover.
- Cannot rollover a Roth IRA into this plan.
- Plan benefits including stock ownership must be made available to all eligible employees of the business.
You Can, but Should You?
We have illustrated several means available to tap retirement savings as a way to salvage or grow a business. Whether any of these strategies is a good idea for your particular circumstance is a complex matter.
There is always risk in running a business and investing in yourself, but that risk is magnified dramatically in the current environment. There are a lot of questions still very much unanswered about how quickly we can expect an economic turnaround and what kind of upward curve to expect. The results are sure to be uneven across different locations and business types.
Losing a business you have spent time, capital, and heart to build could be painful. Losing that business and your retirement nest egg along with it would be far worse. Throwing good money after bad is never a good strategy.
Before you consider any of these options, be sure to perform the best diligence you can and consult with your licensed counsel with respect to the future prospects of your business venture.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
