How to Use Your 401k Plan To Fund Your C Corporation

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poiuytreMegan Hughes and I did a webinar entitled “Your After Election Tax Plan.” We couldn’t get to all of the questions we received during the hour, so we’re covering them at our blogs over the next few weeks.

Today’s question: “Can I set up C Corp funded by retirement money? Would this shelter the income? Do I still need a strategy in order to get a deduction for the corporation?”

I talked briefly during the webinar about using your 401k plan to fund your business. There are really three ways to do it:

  1. Draw out the money and pay the tax and penalty.
  2. If you’re still working for the company where the pension is, take out a loan.
  3. Roll the 401k plan into a new C Corporation’s pension plan (in your name) and then take a loan.

The problem with (1) above is that you’ll pay tax and penalty. The problem with (2) above is that you have to either pay the loan back when you quit the job to work in your new business or you’ll pay tax and penalty.

In the right circumstances, rolling into a C Corporation pension plan can work really well.

Here are the steps:

  1. Establish your C Corporation. If you missed our webinar and want to know more about C Corporations and why those are THE “it” structure for 2013 and beyond, please go to
  2. Set up a 401-k plan in the new C Corporation.
  3. Roll your old plan into your new plan.
  4. Take out a loan from your new plan.

This isn’t a way to tax shelter income, but instead is used as a way to access your funds to start your business.


One Comment

  1. Jim bruner says:

    Diane, I came across your web page…very interesting. I have a question regarding a new start up business creating a new C corp. What are your thought on the BORSA 401K roll over? You mentioned above about rolling over a 401k into the new C corp and borrowing from it. However, using that method the limitation is a $50,000 loan. I have talked to people who used the BORSAa plan and have gotten positive comments. Any comments?

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