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Franchise Financing – Using an IRA or Other Retirement Savings

Prospective franchisees typically must borrow money to start up their new venture. Most people get financing through a bank or lending institution. But there is also another option for financing a franchise that is not so widely known but which offers some real benefits over traditional financing – using your IRA, 401(k) or other retirement accounts to fund a new franchise business.


What are the advantages of using a retirement account to fund a franchise? Consider these factors:

• You’ll be able to start up faster since the paperwork involved in using an IRA is typically faster than loan application processing.

• You incur little or no debt, therefore reducing the overhead generated by interest on loans.

• With lower overhead, your business stands a better chance at success, and will break even faster and generate profits earlier than a business carrying debt.

• As your business succeeds, your IRA grows tax-free


It is generally believed that IRAs and 401(k)s must be invested in stocks, bonds, and cash accounts -- mainly because when The Employee Retirement Income Security Act (ERISA) instituted retirement savings accounts, many banks, brokers and mutual fund firms quickly created and offered custodial retirement services for individuals and employers.


ERISA permits retirement savings – including traditional and Roth IRAs, SEP IRAs, Keogh, 401(k) and 403(b) accounts -- to be invested in for a wide array of options, such as real estate, a business or franchise. However, you cannot use a 401k account if you are still an employee of the company funding and managing it for you. It is only after you leave the company that you can roll it over into other investment vehicles.


There are a few other restrictions for investing retirement savings: life insurance contracts, and collectibles like antiques, jewelry or art are not allowed. Also barred are what are known as "self-dealing" transactions. These are financial transactions in which an IRA owner uses the funds for personal gain, rather than to support the IRA. If you are going to use an IRA or 401(k) to fund a franchise start-up, you must consult with an accountant and a lawyer to ensure that your financial transaction is in complete compliance with ERISA provisions.


Once you have lined up a competent accountant and lawyer, there are several legal steps you must walk through to direct your IRA toward investing in a franchise without causing a distribution subject to taxes or fees. The first thing you will do is to form a “C” corporation. Your lawyer will arrange the paperwork for this. Once your “C” corporation is started, it is eligible to begin 401k program. After the 401k program is established, you can roll over your existing retirement funds into your new corporation’s 401(k) program. Next, the new corporation’s 401(k) plan buys stock in the corporation as an investment. The new corporation now has start-up funding.


Basically, you have just taken your hard-earned retirement savings and invested them directly in yourself and your own business. As your business grows, so will your retirement savings since your 401(k) retirement account holds shares of the franchise business. As it values increases, so does your retirement account with the tax advantages of traditional 401(k)s and IRAs. It sounds simple, and it can be, but it is absolutely essential that you get sound legal consultation so that your new franchise investment funded by retirement savings passes muster with the IRS.

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