0816_TOEFL-Test-and-Score-Manual-1997

Money Matters ● 63
GREAT
IDEA
Invest in Yourself by Tapping
Your 401(k)
After losing his engineering job at Whirlpool in 2009,
Mike Tilley decided it was time to work for himself.
He researched a variety of franchises before he and his wife, Cathy, bought
an existing Mr. Handyman franchise in Kalamazoo, Michigan, by cashing
in his 401(k) retirement fund.
Tilley used the money to pay the $60,000 franchise fee and invested
another $158,000 to buy equipment and to cover other business expenses.
“You really need to believe in yourself to do this,” said Tilley. He was
lucky. His franchise was breaking even by the third month and was on the
road to profitability by the end of the first year.
Tilley is one of thousands of former corporate executives taking
advantage of a little-known transaction called a “rollover as business startup”
by the IRS. It is also informally known as the “entrepreneur rollover
stock ownership plan” or ERSOP. Although pension experts say the IRS
might scrutinize taxpayers who tap into their retirement accounts to fund
businesses, it is still an attractive option to consider, if done right.
“The penalties for not complying with the rules are staggering,” said Cliff
Ennico, an attorney based in Fairfield, Connecticut, who counsels clients cashing
in their retirement funds to purchase businesses. “If the IRS determines
that a 401(k) rollover is a prohibited transaction, it can trigger excise taxes on
top of taxes, interest, and penalties for premature distribution of 401(k) funds.”
It’s a good idea to work with a company that specializes in these transactions.
BeneTrends Inc., founded by Leonard Fischer, is based in North
Wales, Pennsylvania. Every year, the company helps thousands of new
entrepreneurs execute these rollover transactions.
“At the end of the day, all we are doing is helping clients invest in themselves,”
said Fischer, who has been dealing with pension and profit-sharing
issues for 50 years.
Fischer said it works like this: clients set up a new corporation with a
defined contribution plan and roll over the money from their 401(k) into
the “qualifying employer securities” or stock in the new company. “It’s their
job to make the money,” said Fischer. “It’s our job to make sure they are in
compliance with all tax laws.”