Convert a 401k into Equity for Your Entrepreneurial Company

Source: David Worrell, CFO & Director, Scale Finance LLC

I’ve accepted it: Retirement is dead. Anyone still working today might never be able to retire.

So why are we all putting money into retirement savings accounts?  Between IRAs, ROTHs, 401(k)s, SIMPLEs, SEPs and SOLOs, there’s no shortage of ways to save for a day that may never arrive.  And yet Morningstar reports that the average retirement account lost value last year!  (Mine certainly did!)

Here’s a better retirement plan: Stop Saving and Start Building.  

Increasingly, entrepreneurs are tapping their retirement accounts to build a company that will enrich their life now and later.  By building wealth and long-term income rather than savings, business owners are using their creative and productive years to the fullest — multiplying their wealth themselves rather than worrying about the ups and downs of the stock market.

If you have an IRA or a 401(k), there is now a way for you to use retirement savings to fund your business growth — or even start a new business.  Turn your retirement account inside-out and put that money to use. See an overview of the mechanics of this process, pros and cons, and tax implications here.

Forty years ago, you could put your retirement savings into the stock market and then launch a business by borrowing money from a bank.  It made sense to “borrow and invest”.  But today banks aren’t lending and the stock market is, well, not exactly a reliable source of returns.

The new rule: Cut both the bank and the market out of your business plan.

Consider the benefits:

  1. No Taxes: Money in a 401(k) or IRA was invested pre-tax.  You can invest those dollars into your business without paying tax on them.
  2. No Debt:  Using your own money to build a business avoids high priced loans and can ease your business cash flow.  Imagine owning a debt-free company.  Life is good.
  3. No Waiting:  Retirement accounts can be converted to cash for your business in just 3 to 6 weeks (depending on what state you live in).  I have yet to meet a bank that can approve a loan that fast!
  4. No Whining:  You keep complete control of your business. No bankers or pesky partners telling you what to do.
  5. Lots of Leverage: If you’re building a really big business and want to borrow more from a bank, use your funds as a down payment on a larger loan — even an SBA loan.
  6. Lots of Flexibility:  Use the money for any legit business purpose.
  7. Need more?  Check out my retirement savings video then call me back!

OK, so how do you move your retirement account into your business?  It turns out that this is not just a finance issue, but a legal one.  The short answer: Get a trusted team involved.  Some of the companies that provide this service include:

These intermediaries will help you structure what is called a QES — Qualified Employee Stock Purchase Plan — offered through a corporate 401(k).  That’s the heart of this transaction, but there’s more to it than that.  A good intermediary will assist you with corporate issues too, including creating and maintaining the correct form of corporation, a private placement memo and “Regulation D Rule 506? compliance, ERISA compliance, corporate filings, tax filings, 401(k) administration and accounting.

Starting to sound complicated?  A good intermediary will make it simple.  Do not attempt this alone — it takes a practiced securities attorney to do it right and a “plan administrator” is required by law to maintain the retirement accounts.

Practically speaking, you should have a minimum of $50,000 in current retirement accounts. You can do less, but it may not be cost effective because there are fees to setup and maintain these accounts:  There’s a flat fee for the upfront legal work and filing fees. (This can vary, but expect $5,000 or so.)  There is also an annual plan administrator fee (Typically $1,000 per year).

There is no hard limit to the amount you can convert.  Do you have half a million?  Access it all if you want.

Once your current retirement accounts are transferred into the new corporate account (technically its a rollover, just like any other retirement rollover), you can use the money for whatever you need — salaries, vehicles, land, buildings… any legitimate business purpose.

In fact, since this is a rollover, you may be able to consolidate all your retirement accounts into the new plan, use what you need for the business, and keep the balance invested in whatever you want.

BONUS:  When your business makes money, you can begin to put pretax money back into the 401(k) plan.  So a well-crafted plan provides both a source of funding for your business now and a tax shelter later.

I’m betting you have questions.  Leave me your questions below and I’ll have an attorney answer them so everyone can see the best advice.  Or give me a call and let’s talk!

Dedicated to your (self-funded) profits,  David Worrell, Scale Finance

PS:  PLEASE NOTE:  Every single retirement account is different.  To set up your QES plan and 401(k) account you will need excellent legal advice from a securities attorney who should evaluate your specific situation. Leave me your questions below or contact my favorite QES plan intermediary.  Remember, the IRS wants you to keep good records — document every step correctly and keep your business accounts separate from your personal financial life.  And for a good video explaining this concept, check out

About Scale Finance

Scale Finance LLC ( provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.