Funding a business with a 401(k)

Tours at the Hardware Distillery

Tours at the Hardware Distillery

The stock market scares Jan Morris. So last year she and her husband Chuck took most of the money in their retirement accounts and invested it in something most financial advisors would regard as even more risky than stocks: a small business start-up, specifically, one making high-quality artisanal gin and whiskey from a renovated distillery on the edge of the Olympic National Forest in the Pacific Northwest.

Jan, 62, and Chuck, 63, are the proud owners of The Hardware Distillery in Hoodsport, Washington, a 100-mile drive from Seattle along the Hood Canal.

Any new business is a risk. But they financed theirs with a little-known transaction called rollover-as-business-startup (ROBS). A ROBS allows would-be entrepreneurs to roll over an existing 401(k) or Individual Retirement Account (IRA) to a 401(k) plan set up within a new company, and then have that 401(k) purchase stock in the new business.

“I know this isn’t the conventional thinking, but I don’t trust the stock market,” says Jan. “For me, to find a way out of the market was fantastic. The idea of buying a building, fixing it up and relying on my own labor made a lot of sense.”

Morris regards the business as a venture for the couple’s retirement. She’s a lawyer and still teaches art part-time; Chuck works full-time as a structural engineer. But they both anticipate putting all their time into the distillery before long.

They invested several hundred thousand dollars purchasing a building for the distillery, and the equipment they needed to make vodka, gin and one drink found nowhere else: a distilled honey mead that starts out 80 percent honey and 20 percent fruit, called Bee’s Knees.

Does it make sense to raid a retirement account to fund a business start-up? And, should the tax benefits of a 401(k) or IRA be available for this kind of investment? Learn more in my column this month at WealthManagement.com.