According to the latest Kauffman Foundation report on entrepreneurial activity, the percentage of new entrepreneurs between the ages of 55 and 64 has grown from 14.3 percent in 1996 to 23.4 percent last year, and entrepreneurship among 45-to-54-year-olds is also on the rise. In fact, according to the Bureau of Labor Statistics, those 65 and older have the highest rate of self-employment today.
Perhaps this is not surprising given that so many of us are living longer and healthier lives than ever before. That coupled with the fact that recent economic challenges have made it nearly impossible for many older people to retire altogether is what is driving this relatively new yet steady trend. Plus, let’s not forget all the newest technologies that now make it easier for anybody to own and operate their own business opportunity, distributorship, licensee opportunity, small franchise or other small business, oftentimes from the comfort of a work-at-home office and with little to no overhead.
For many so-called baby boomers born between 1946 and 1964, having the opportunity to start a small business represents a kind of freedom and independence that they’ve never had before and that they now welcome. For others, it’s become a matter of necessity. Either way, for far too many older people who are on a fixed or dwindling income even relatively reasonable startup costs can make business ownership seem out of reach.
But the picture may not be as dreary as it seems.
For older individuals who want to be business owners and have retirement savings, but who do not have cash in hand, there is an option you may not have heard about.
It’s called a ROBS. ROBS stands for ROllover Business Start-up, and while it does involve tapping into your retirement funds, the rules are a little different when you’re using the money to start a business or buy one. In fact, the ROBS option does not subject you to the same restrictions as would be the case with a self-directed IRA.
Here’s the much simplified version of how it goes…
If you have a 401(k) or IRA funds, the IRS will allow you to roll money over into a new 401(k) for the purpose of business startup or purchase, and it is then used to buy qualifying employer securities in a newly created C Corporation. As the fund’s owner, you are then allowed to be actively involved in the business, to draw a salary, guarantee a business loan and provide jobs for family members working under the auspices of a “family-owned” business.
Now, one of the upsides to the ROBS approach is that you can use the full amount of the 401(k) money for the business without paying taxes on it at the time and without paying a withdrawal penalty. However, there is a downside. Given that you must be set up as a C Corporation, you may be subject to higher taxes than you would as either an S Corporation or an LLC.
Of course, there are other options other than the ROBS. A safer bet is to simply take a loan from your existing 401(k), which can be as much as half of its value or up to $50,000, whichever is less. However, it will have to be repaid within five years in quarterly payments. In essence, you give yourself a loan, but you’re told when and how you must pay it back.
Or, you can also elect to take a large disbursement out of your account, but only if you’re willing and able to pay the taxes on that money, as well as the 10 percent penalty. And that’s something few people over the age of 55 or so can afford or want to do these days.
While it’s true that buying a business opportunity or starting any small business is a risky venture, the payoff in terms of self-fulfillment alone can make it all worthwhile. If you’re older and do have retirement savings that you’d consider tapping into to get a business going, the key is to find a skilled financial advisor who can educate you on what your options are and then guide you through the process.
Thankfully, for those who are determined to be entrepreneurs and who have the passion and skill set to take a gamble on themselves, no matter what their age, there are creative funding options out there. Just knowing what they are so that you can ask all the right questions is half the battle.