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Can You Use a 401(k) as an SBA Loan Down Payment?
If you have a 401(k) account or another approved tax-deferred retirement account with at least $50,000 in it, you may be able to use those funds as a down payment for your SBA loan.
Getting the money for a down payment can be one of the most challenging parts of applying for an SBA loan.
However, if you have a 401(k) account, or another approved tax-deferred retirement account with at least $50,000 in it, you may be able to use those funds as a down payment on an SBA loan — all without incurring any tax penalties. Here’s how.
Rollovers as Business Start-Ups (ROBS)
If you have an IRA, 401(k) or 403(b) account, the U.S. government’s Rollovers as Business Start-Ups (ROBS) policy permits individuals to use their retirement funds to start or buy a business in only a few weeks. Plus, since there is no loan involved, no credit requirements apply.
Being able to access tax-deferred retirement accounts often means borrowers can make larger down payments, which can increase the amount of funds they can get, and may also mean better interest rates.
How ROBS Actually Works
In order to make use of ROBS, you’ll have to take several important steps.
The first typically involves creating a new business as a C corporation. That C corporation will then create a new 401(k) plan, and the funds from your previous 401(k), IRA, or other tax-deferred retirement account will be rolled into the new corporation’s 401(k).
Next, the 401(k) will buy stock in the C corporation, providing it with cash that can be used for your SBA loan downpayment. Since the process can be somewhat complex, you’ll likely want to use a third-party ROBS consultant or advisor to help guide you through it with as few delays as possible.
How Do I Qualify for ROBS?
In order to be eligible for a ROBS transaction, a borrower will need to:
Have at least $50,000 in an approved, tax-deferred retirement account, typically a 401(k), 401(b), or IRA (Roth IRAs don’t qualify).
Be an “active employee” of their company (in any role), not simply a passive investor.
The company itself must also be actively involved in a specific business, and cannot simply invest passively in another business or financial instrument.
Typically, ROBS transactions can be completed in as few as 3 weeks, making them a great way to get down payment funds for businesses that need them fast. Plus, using tax-deferred retirement funds for business down payments helps borrowers maintain the amount of cash they have on hand for emergencies, working capital, and other expenses that may come up in the process of running a business.
Case Study: Using a 401(k) for a Down Payment on a Bakery
Laura, a passionate baker, had always dreamt of opening her own boutique bakery in Greensboro, North Carolina. She found the perfect location in a charming neighborhood with a growing customer base, but she needed a loan to purchase the property, renovate the space, and purchase necessary equipment.
Laura estimated that she would need a $300,000 loan for her bakery. However, she lacked the cash for a substantial down payment, which would have been a hurdle in securing an SBA 7(a) loan. Luckily, Laura had a 401(k) account with a balance of $80,000 from her previous job.
After researching her options, Laura discovered the Rollovers as Business Start-Ups (ROBS) policy. By using ROBS, she could use her 401(k) funds as a down payment on her SBA loan without incurring tax penalties. Laura sought the help of a ROBS consultant to guide her through the process.
Following the consultant's advice, Laura created a new C corporation for her boutique bakery and established a new 401(k) plan for the corporation. She rolled over her previous 401(k) account into the new plan, which then purchased stock in the C corporation. This provided the corporation with the necessary cash for her SBA loan down payment.
With her down payment secured, Laura presented her detailed business plan to the lender, demonstrating her passion, vision, and expertise in the baking industry. The lender was impressed with her plan and approved her SBA 7(a) loan application, granting her the $300,000 she needed to start her boutique bakery.
Laura used the loan funds to purchase the property, renovate the space, and acquire the necessary equipment. Her bakery quickly became a popular spot in the Greensboro community, offering delicious baked goods and a cozy atmosphere for customers to enjoy.
Thanks to the ROBS program and the SBA 7(a) loan, Laura was able to bring her dream of owning a boutique bakery to life and create a thriving business in her community.
This is a fictional case study provided for illustrative purposes.
Related Questions
What are the requirements for using a 401(k) as an SBA loan downpayment?
In order to be eligible for a ROBS transaction, a borrower will need to:
- Have at least $50,000 in an approved, tax-deferred retirement account, typically a 401(k), 401(b), or IRA (Roth IRAs don’t qualify).
- Be an “active employee” of their company (in any role), not simply a passive investor.
- The company itself must also be actively involved in a specific business, and cannot simply invest passively in another business or financial instrument.
Using tax-deferred retirement funds for business down payments helps borrowers maintain the amount of cash they have on hand for emergencies, working capital, and other expenses that may come up in the process of running a business.
Source: www.sba7a.loans/sba-7a-loans-small-business-blog/401k-as-sba-loan-down-payment
What are the risks associated with using a 401(k) as an SBA loan downpayment?
Using a 401(k) as an SBA loan downpayment can be a great way to access funds quickly, but there are some risks associated with it. The most significant risk is that if the business fails, the borrower could be subject to taxes and penalties on the funds used for the downpayment. Additionally, the borrower must be an “active employee” of the company, not simply a passive investor, and the company itself must be actively involved in a specific business, and cannot simply invest passively in another business or financial instrument.
For more information, please see this article.
What are the benefits of using a 401(k) as an SBA loan downpayment?
Using a 401(k) as an SBA loan downpayment can be beneficial in a few ways. First, it allows borrowers to access tax-deferred retirement accounts, which often means they can make larger down payments, which can increase the amount of funds they can get, and may also mean better interest rates. Additionally, ROBS transactions can be completed in as little as 3 weeks, making them a great way to get down payment funds for businesses that need them fast. Plus, using tax-deferred retirement funds for business down payments helps borrowers maintain the amount of cash they have on hand for emergencies, working capital, and other expenses that may come up in the process of running a business.
In order to be eligible for a ROBS transaction, a borrower will need to have at least $50,000 in an approved, tax-deferred retirement account, typically a 401(k), 401(b), or IRA (Roth IRAs don’t qualify). They must also be an “active employee” of their company (in any role), not simply a passive investor. The company itself must also be actively involved in a specific business, and cannot simply invest passively in another business or financial instrument.
Are there any alternatives to using a 401(k) as an SBA loan downpayment?
Yes, there are alternatives to using a 401(k) as an SBA loan downpayment. You can use other retirement accounts such as an IRA, 403(b), or other rollable retirement accounts. You can also use personal funds, or funds from other sources such as family or friends. Additionally, you can use a combination of these sources to make a downpayment.
For more information on SBA loan down payments, please visit https://sba504.loans/down-payments/.
What are the tax implications of using a 401(k) as an SBA loan downpayment?
Using a 401(k) as an SBA loan downpayment through a Rollovers as Business Start-Ups (ROBS) transaction is a great way to access tax-deferred retirement funds for business down payments. However, it is important to note that the IRS does consider ROBS transactions taxable events. This means that any funds withdrawn from a retirement account for a ROBS transaction will be subject to income taxes and, if applicable, early withdrawal penalties. Additionally, any gains made from the ROBS transaction will be subject to capital gains taxes.
For more information on the tax implications of using a 401(k) as an SBA loan downpayment, please consult a qualified tax professional.