401k rollover to start a business

[expressfin]

I have a client that rolled over his 401K ($250k) to a self directed retirement plan (thru Guidant) and invested the total in a new business corporation. The business has failed and the money is gone. I don't see any tax loss in this situation, anyone had this situation? What are the options if any?

[S T]

Not that this answers your question

However, here is a link to the Guidant site that explains how it works

https://www.guidantfinancial.com/info/401k-small-business-financing.aspx?utm_source=Google&keyword=401k%20business%20startup&utm_medium=cpc&utm_nooverride=1&s_kwcid=TC%7C13903%7C401k%20business%20startup%7C%7CS%7Cb%7C5940436221&gclid=CJCpwpv0lq0CFdGR7QodORzqnQ

Sandy

[taxmandan]

He'll save taxes on the retirement funds that he won't be withdrawing from his retirement plan in the future. At future tax prep meetings you could show him how much he saved in taxes by not having anything to withdraw that year from his 401(k). Then again, his results are probably not any worse than leaving the money in the hands of financial experts on wall street.

[Koss]

401(k) Loss

You are correct that there is no deductible loss.

The money that he lost, within the retirement plan, was pretax. He never paid tax on it to begin with.

The result would be the same if he had lost it all in the stock market.

As taxmandan noted, because the money is gone, he'll never have to pay tax on it.

BMK

[joanmcq]

And another case study in why using your 401(k) monies to start a biz is a BAD idea. And if the strategy is considered a sham, he gets to pay tax on a $250k withdrawal (plus penalties).

[Y2KEA]

And another case study in why using your 401(k) monies to start a biz is a BAD idea. And if the strategy is considered a sham, he gets to pay tax on a $250k withdrawal (plus penalties).

Don't know what the Guidant position is on this or If the IRS even has one, but I agree with joanmcq, however with a twist. If not sham, there was no "withdrawal".

When it comes time for an RMD, the IRA is holding a note receivable for $250K. The penalty for excess accumulations may apply.

[JG EA]

Expressfin: I do have a client in this exact position. I refused to all but his personal return. And just like your client he has lost. Not everything yet but just about.

About RMD - it is based on prior year Value - so no problem there.

[Lion]

Rmd

RMD can be a huge problem if the only thing in the retirement account is real estate. You'd have to sell something to get cash to make the RMD in time. Good luck with that.

[taxxcpa]

I'm not sure what took place.
If he withdrew all of his money, then invested it in a business that failed, he would have taxable income from the withdrawal and an investment loss on the business.

If he left it in the IRA and invested it within the IRA it would just reduce the value of his IRA to zero, so he would never have a RMD since there would be nothing to withdraw.

[JG EA]

RMD can be a huge problem if the only thing in the retirement account is real estate. You'd have to sell something to get cash to make the RMD in time. Good luck with that.

True enough. In my client's case the IRA invested in (by establishing) a corporation that is now fizzling. There will be nothing left when it is all over.