How Tax Law Changes Benefit Small Business Financing
A Home Business Article Contributed by G. Uma Bennett
How Tax Law Changes Benefit Small Business Financing
If you are interested in small business financing, consult a tax professional and find out how you can benefit from a tax law change that allows you to borrow up to $50, 000 tax-free from your 401(k) retirement account. Now any business can establish a self-employed 401(k) plan that comes with a loan feature. It doesn't matter if your business is a startup or has been around for years. You can run your business part-time or full-time in the form of a sole proprietorship, 1099 contractor, partnership, LLC, or corporation.
Obtaining Your Small Business Financing from Company Benefits
To use the benefits of your 401(k) for small business financing, consult with your accountant on the process of setting up your account. Once you've set up a self-employed 401(k) you can transfer balances from your IRA, 401(k), 403(b), or other qualified retirement funds into your self-employed 401(k). You can then borrow up to 50% of your 401(k) account balance for a maximum loan of $50, 000. The loan withdrawal is tax-free and penalty free provided you pay it back with interest to your 401(k) plan.
How Small Business Financing Works with a 401(K) Loan
Securing small business financing using your 401(k) funds has become easier. Most large companies 401(k)'s have a loan feature for their employees.
But once you leave the company to start your own business you lose the privilege to borrow from their 401(k). Before tax law changes that went into effect in 2003, you could not own a business and borrow from the 401(k). Taking money from your IRA or other retirement accounts meant having to pay taxes on the distributions, and probably a 10% tax penalty if you were younger than 59 ½. You also lost the chance to put back the money in your retirement account.
Boons to the 401)K) Flow Through to Small Business Financing
Having all the pieces in place with a 401(k) plan loan feature for your small business financing means you won't have to lose a large part of your nest egg to taxes and penalties if you put the money back in your 401(k) account within five years as per the loan terms.
This self-employed 401(k) is even better because it allows you contribute more towards your retirement by making tax-deductible contributions every year to this plan at levels more generous than most other retirement plans available to small businesses. With all of its features, the self-employed 401(k) is fast becoming the retirement plan of choice for small business owners.
Dealing with the Small Business Financing Paradox
Most entrepreneurs find the quest for small business financing to be a complicated matter. The lure of financial success is what propels most prospective entrepreneurs. At the same time insufficient financial resources is what keeps them from pursuing their dreams. Insufficient financial resources deter most people from starting their own business along with the need for a regular paycheck and fear of failure. Other factors that discourage entrepreneurs is the lack of definitive information, many are simply uncertainty about how to get started.
