Using 401K toward Down Payment

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We are looking to buy a B&B but don't enough cash for what we expect to need for a down payment and we are not old enough to take a 401k withdrawal for this purpose without penalty. In researching financing options I found some information on a way to use 401K money by creating a C Corporation and investing in the corporation through a self directed 401K with the corporation then buying the B&B.  I was wondering if anyone on this Forum has used or knows someone that has used this as a way to buy a B&B and would be willing to share their thoughts/experience on this idea. 

PhineasSwann's picture
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You actually can do it as a C-corp as well. That's what we are. 

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I may have misspoken when I said "S Corp".  I believe you have to be a C Corp to set it up. 

We've not done it and I'm going by a conversation I had.  But whomever is used to set it up for you can guide you. 

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Thanks for the great reply. I was hoping that someone had actually done this themselves so thank you PhineasSwann for taking the time to reply. One other related question is how did you set up your corporation ?  Is that something that Benetrends or (for MNVineyarsdBB ) Guidant helps with or do they just do the 401K set-up and management part ?

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Guidant does all the work.  You pay them to set up and then there is a monthly fee for them to administer it which is basically submitting the papework the IRS requires.

You do have to be an S Corp to be able to do this.  Which may mean setting up an S Corp which is actually pretty easy to do.

PhineasSwann's picture
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One of the benefits of using the self-directed 401k program is that it counts as a rollover to a new plan, not a withdrawal, so you don't pay any penalty. 

JimBoone's picture
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PhineasSwann wrote:

One of the benefits of using the self-directed 401k program is that it counts as a rollover to a new plan, not a withdrawal, so you don't pay any penalty. 

Out of curiosity how does this affect the end game down the road? I paid the penalty and invested my retirement from a job I left in 1990 into our business, since that time I've retired from another job and rolled over retirement funds into a fund with the credit union, however I'm past the age where I'm required to take distributions from that fund (and pay tax on them) during the last few years. If your retirement fund is invested in your business how are those taxable withdrawals made in the future?

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PhineasSwann's picture
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JimBoone wrote:

PhineasSwann wrote:

One of the benefits of using the self-directed 401k program is that it counts as a rollover to a new plan, not a withdrawal, so you don't pay any penalty. 

Out of curiosity how does this affect the end game down the road? I paid the penalty and invested my retirement from a job I left in 1990 into our business, since that time I've retired from another job and rolled over retirement funds into a fund with the credit union, however I'm past the age where I'm required to take distributions from that fund (and pay tax on them) during the last few years. If your retirement fund is invested in your business how are those taxable withdrawals made in the future?

Great question. When you sell your business at retirement, the proceeds go back into the self-directed 401k. Then you're able to withdraw them as you would any additional retirement fund, and of course pay the taxes as you would withdrawls from your 401k whether it was invested in stocks, bonds, real estate, or any other business.  

For those not planning to sell their B&B after they reach retirement age (59 1/2 to begin withdrawals from 401k's) then you've got a different challenge. The business could pay you as a director some fee or bonus, but the IRS has limits to how much this would be -- which is why it often pays to employ one of these management companies with the lawyers to keep you straight on it. 

The best way to keep it straight in your mind is that your 401k is buying stock in your business, instead of in Apple, AT&T or some mutual fund. 

 

JimBoone's picture
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PhineasSwann, thanks for the additional information, please know that wasn't challenging the suggestion, it sounds like an interesting approach to me, in my case I thing my tax penalty was smaller than the cost of setting up a self directed account.

I admit to being the odd duck in that my retirement idea is to just keep on being an innkeeper as I can't think of anything I'd rather do.

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 I didn't read it negatively at all! 

Hey, I know how you feel. Our business *is* our entire retirement nest egg right now, so I know how important this all is! 

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PhineasSwann wrote:

I didn't read it negatively at all! 

Thanks for the comment, I was afraid maybe I sounded negative. I reached retirement age ten or more years ago and looked at options, a rundown place in the country, yes, but not practical at this stage of life, a condo, I think that would drive me nuts quickly, in the end nothing looked as good as just keeping on, fortunately our daughter and husband chose to move next door a couple of years ago and become involved with mom and I.

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Rymntigger wrote:

We are not old enough to take a 401k withdrawal for this purpose without penalty. 

Not an answer to your specific question, but a few years after purchasing our place I did close our my retirement fund, paid the penalty and invested the funds in the business, negotiating a better loan in that process.

I suppose it all depends on the $'s you have in retirement savings, mine were not all that large, but I felt they were better invested in business.

I would weigh the cost of the penalty VS cost and ongoing expenses of the process and let that be my guide.

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We financed the purchase of our B&B through this method, using a company called Benetrends. Essentially you're taking your tax-sheltered dollars and rolling them over to a new 401k, one that you've created. Then once that new 401k is operating, it "invests" your retirement savings in a new business, specifically, yours. 

There are rather strict legal requirements for filings and paperwork with the IRS, and you're initially paying the management company to know all of these things and take care of them for you. 

We've been paying Benetrends for four years to do this, and just now feel like we can start turning it over to our accountant. 

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It definitely can be done. We looked at this years ago, but decided we didn't know enough about ourselves to risk our retirement. (Yeah, like the stock market hasn't taken us for a ride, too!)

So, take a look at it. Investigate the companies that say they can set it up for you. Find out the costs involved.

Good luck!

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Wow....talk about timely.  I have a call scheduled with Guidant Financial on Thursday to talk about that same process.  Only in our case the money would be used to start another business.  But from what I can tell there really isn't a down side to that option.  Guidant charges $5,000 to set it up and then they want $119 a month to administer it.  But I suspect once it's set up you can have a local CPA do the administration and then cancel the monthly service of Guidant.

 

 

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