Mesa resident Doug Topham was flying high as a top executive at GE Financial Services, but he grew tired of the constant travel and disruption of family life that came with the job.
So Topham decided to quit the corporate world and become his own boss. But owning your own business takes a lot of money up front, he said.
“My largest asset at the time was retirement funds,” Topham said. “I’d worked at four different companies in the financial services business and had several different retirement accounts.”
He knew there would be heavy tax consequences if he used his retirement funds to buy a business, so he did some digging and found out there was a way he could do it with the help of Californiabased BeneTrends.
The company’s Rainmaker Plan, developed by founder Leonard Fischer, an attorney, allows people to use their retirement funds to start new businesses, buy franchises, buy existing businesses and raise capital for existing businesses.
People using retirement funds to start a business is a trend, Fischer said.
“There are very few (retirement plans/funds) that you cannot use anymore,” he said. “The only time you can’t use them is if the employer’s plan does not permit a distribution in a lump sum. Unless someone was a member of a collective bargained plan, there’s an extremely high probability that they could use their funds to start their own business.”
The Internal Revenue Service offers publications on its Web site, www.irs.gov, that detail options for withdrawing retirement funds. Publication 575 deals with pension and annuity income, while Publication 490 deals with IRAs.
“By finding out the rules as to if you have any sort of potential penalty, then you can weigh your decision as to ‘is this something that I want to do’ (use retirement funds to start a business),” said Bill Brunson, IRS spokesman in Phoenix.
Fischer’s Rainmaker Plan involves establishing a Ccorporation, whose profits are taxed separate from its owners under subchapter C of the Internal Revenue Code, for the new business. The Ccorporation then establishes a new retirement plan and your current retirement funds are rolled over into the new plan.
Finally, the new retirement plan invests in the stock of the corporation.
“As long as it’s an active business, the IRS doesn’t care,” Fischer said. “It has to be a legitimate, real business that the clients end up with.”
Topham purchased an existing business, Christmas Light Decorators, which is now the state’s largest lighting and decorating business.
“We currently light and decorate over 180 shopping centers in the state, including many of the major malls,” he said. “Last year, we did 11 cities in Arizona.”
Topham then bought another existing business, Centsible Holiday Lighting, which imports lights and other electrical products. And finally he started a third company, Meridian Roofing, with two partners.
“The first two companies are interconnected and the third one is completely separate,” he said. “However, the money to do them all came from the same source. It was initially from my retirement funds and I was able to leverage those as the businesses grew. All told between the companies, we now have at peak season somewhere around 50 to 55 employees.”
Topham said his retirement outlook is much better than if he had stayed with one of the large financial services companies.
“As the company goes up in value, I have more in value in that retirement fund,” he said. “Through this vehicle, I’m also allowed to invest more back into my retirement fund also.”
If someone is considering using their retirement funds to start a business, it’s important that they do their homework and make sure they know what they’re doing, Fischer said.
“It is retirement funds, and yes, as with any dollars, you should be careful with them,” he said.