Anyone every cashed in retirement funds instead of rolling over?

Question

I am debating if I should take the penalty hit on cashing out my retirement fund and be free to invest the money however I want. I know everyone says its better to roll it over to self-directed but I need the money for a small business as well and rather not deal with the paper work if I don't have to.

I guess what I am asking is in what situation would it make more sense to just cash out?

Thanks!

I guess what I am asking is in what situation would it make more sense to just cash out?

Thanks!

Stacey Adams · Answer

@Mark Nolan  Thanks for the advise.

Stacey Adams · Answer

@GregoryTibok

Thanks for the information but I think my startup is small potatoes for that process.  But I am glad to know I can go down that road in the future.

Stacey Adams · Answer

@BrianEastman   Thanks for the information.   I am starting a small online business and I have chosen to register it as an LLC.  If I were to pursue your suggestion I would need to change the entity and it looks like a lot of additional paper work.  Since I need much less then $50, as you stated, this probably is not a great option for me.

Mark Nolan · Answer

@Stacey Adams

If you don't have any other means of funding a business, then I always tell individuals to weigh the benefits of taking a distribution versus using the money to invest in your own business through the retirement account. For instance when a distribution is taken, a 10% early distribution penalty generally applies if you are under age 59 1/2 and of course  federal taxes apply as well as generally state taxes. As a result, half of your retirement funds might go to the government if you take a distribution versus using your retirement funds to invest in the business directly through the retirement account. But of course when you use your retirement account to invest in your business there's a number of compliance requirements at the beginning as well as an ongoing basis.

The following IRS website cover the ROBS.

https://www.irs.gov/Retirement-Plans/Employee-Plans-Compliance-Unit-(EPCU)-Completed-Projects-Project-with-Summary-Reports-%E2%80%93-Rollovers-as-Business-Start-Ups-(ROBS)

Also, here is how the process generally works.

• A new C-corporation is established.

• Corporation sponsors a new 401k/PSP.

• The IRA funds are transferred to a new brokerage account opened for the 401k/PSP.

• The new franchise corporation issues stock shares to the 401k/PSP for the benefit of the franchisee.

• The franchisee must be an employee of the franchise business and he or she may take a reasonable salary.

• The franchisee’s family members may be employees of the franchise  business and receive reasonable compensation for their services.

• To the extent that the corporation generates profits and elects to  distribute those profits to the owners of the business, the percentage  of the profits associated with the shares held in the 401k/PSP will flow  back to the 401k/PSP brokerage account.

Brian Eastman · Answer

@Stacey Adams

There is structure known as a Rollover as Business Startup that allows you to basically have your retirement fund invest in your business.

The business must be structured as a C Corporation.

The business will sponsor a 401l/Profit Sharing Plan

You can rollover your existing retirement savings to the plan.

The plan can then purchase shares of the sponsoring company.  There are no taxes or penalties for making this investment, and the shareholder capital can be used for any legitimate business expense including startup, your salary, inventory, etc.

The business will operate as a taxable business, but any dividends issued to shareholders will be tax-sheltered to the retirement plan.

This is not a simple or low cost structure, but can be a valid method of capitalizing your new business.  I'd recommend this plan only if you intend to invest $50K or more of retirement savings into your business.

Nick DePrizio · Answer

@Stacey Adams

Ah a finance question- I know more about finance than real estate so-

first- there are many factors- generally I would say don't cash in/withdraw. There are some caveats to that statement-see the bottom. The second (first time home buyer) may be viable if you or your spouse can be considered a first time home buyer. Generally I would say the withdrawal penalty is too high otherwise- there are alot of smart people and interesting topics on this site that talk about ways to get RE deals done with little or no $$. I'd take a serious look at those before taking the income tax hit and the extra 10% penalty for early withdrawal. Also- stop investing in the retirement accounts if you'd rather invest in real estate or real assets so you don't have to worry about it.

(Side note if it's a Roth 401k/Roth IRA you can withdraw contributions tax free after a 5 year holding period)

See the two below (

http://money.usnews.com/money/retirement/articles/...)

Turn age 59 1/2. Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10 percent penalty. But regular income tax will still be due on each withdrawal. IRA distributions are not required until after age 70 1/2.

A first home purchase. You can take a penalty-free IRA distribution of up to $10,000 ($20,000 for couples) to buy, build or rebuild your first home or the first home of you or your spouse's child, grandchild or parent. For the purposes of avoiding the IRA early withdrawal penalty, the IRS considers you to be a first-time homeowner if you or your spouse did not own a home during the two-year period leading up to the home sale. If the purchase or construction of your home is canceled or delayed, put the money back in your IRA within 120 days of the distribution to avoid the penalty.