Did you know you can use your 401(k) to buy a business? (Here's How)

Brian Luebben (0:00)

If you have six figures trapped inside of a 401k right now, there's a structure you can use that you probably don't know about that will allow you to buy a cash flowing small business without cashing out your 401k, paying the taxes, or paying the pre-penalty. As in, yes, a million dollar plus cash flowing existing small business, not the stock market, not index funds, and actual business. So this is a structure that can allow you to actively run this company, pay yourself a salary, and use this income to fund your life. Again, this isn't even talking about liquid capital. This is talking about the funds that are sitting collecting dust in your 401k or your IRA right freaking now. So this is a really, really cool opportunity that we're talking about today. But if you do it incorrectly, you could cause a massive tax problem. So please pay attention to this video, and we're going to go through how to avoid making that exact tax problem. So basically, there are four ways to access retirement money for business acquisition. Most people don't know that you can do this at all, let alone that there's four different ways. Three of them have serious limitations and kind of suck. The fourth is called the Rob's Strategy, and that's primarily what we're going to be focused on today as the primary structure that you can use as a high-income, high-earning professional to go buy a cash-filling small business of your own so that you finally have control on your equity, upside, and income.

So today, I'm going to show you exactly how it works to use your 401k to generate six figures in cash flow that you can actually use. So let's do a quick example. Let's say that you earn $200,000 and you have $150,000 trapped in a 401k. And now, you're looking at real estate, you're looking at businesses, and you've decided you want to buy a cash-flowing small business, and you finally found a business that you want to buy.

The issue is you need the business cash flow to pay your mortgage and your bills, not lock all that cash flow inside another retirement account. A little known thing that people don't understand fully is that typically and traditionally, outside of the structure we're talking about today, when you use an IRA or a 401k to invest in real estate or to invest in a business, typically, all of that income distributes back to the retirement vehicle. If you get a business that cash flow is $100,000, that $100,000 typically will go back to that retirement account, which means you can't use it to pay your bills, can't use it to put food on your table for your kids, can't use it to buy a cheeseburger. So I've always wanted to be able to actually use the income and cash flow from the businesses that I'm buying. Crazy, wacky idea, right? So there's a way to do that, but not how you're traditionally doing it. So the four different ways that you can access your retirement funds is, number one, you can cash out the retirement account. I am crazy.

I did that. So I'm not saying that's financial advice whatsoever, but I did that back in 2019 I cashed out my retirement account. Number two is you can borrow from the retirement account. You can borrow from your 401k. Number three is you can invest through a self-directed IRA. Or number four, you could do what I recommend, which is use the Rob's structure. Okay? So option number one is cash out the account. Here's what happens if you have $150,000 in your account and you decide like I did to just cash it out. Because for me, I was just like, man, I am sick of this. I don't want to deal with all this complexity. I just value simplicity. I want full control of my money. And honestly, I got pretty pissed off that I didn't have any control of this hard earned capital that I was deploying year after year after year into my 401k. I was one of the people that was maxing out my 401k every single year that I was in corporate. And I was like, what do you mean that I can't do whatever I want with it or use it to go invest in something else? That's ridiculous. So if you cash out the account, you're going to pay a 10% penalty. We're going to pay taxes, active income. So I was making a quarter million dollars a year. So I think I was taxed at like a 23 to 30% taxable rate. So that income was on top of that at that same tax rate. So basically call it a 40% haircut on whatever funds you have in that account, right? So in this example of $150,000, that capital, that's going to be deployable capital after taxes, it's going to be between $85,000 to $90,000.