The IRA Job Machine

Kip T. Tobin lives in Akron, Ohio, and in 2003 he found himself out of a job after working 20 years for a rubber importer. Rubber City, as Akron is still called, had by that time shed most of its traditional tire industry and been reduced largely to Goodyear. Tobin needed a new career.
Instead of seeking another perch inside the corporate ranks, Tobin attended a franchise fair in Washington, D.C., and in June 2005 acquired the Akron franchise of Express Employment Professionals, an employment agency. The franchise license cost Tobin $25,000, and he was expected to invest another $130,000 to $175,000 to get it off the ground.
Tobin didn't have that much available in ready cash, but he did have an IRA worth much more. He could have cashed it in, paying ordinary income tax and a 10% early distribution penalty. Not an appealing prospect. Instead, Tobin, at the employment company's suggestion, went to a specialist broker who, through a series of complicated legal transactions, arranged for him to use his tax-deferred savings account to finance his new business--without the money first being distributed and taxed.
Today Tobin and two other employees are gainfully employed finding work for professionals in the Akron area precisely because he was able to crack his IRA penalty-free to start a new business.
With little credit available to entrepreneurs in the recession, the method, known as a "Rollover as Business Start-ups," has become much more popular recently. A transaction typically works like this:
The owner of the account creates a "C" corporation, which then adopts an off-the-shelf 401(k) plan. Employees of the new company are allowed to roll funds over from their personal IRAs into its 401(k). The corporation then issues stock and establishes a qualified profit-sharing plan that allows employees to exchange assets in their 401(k)s for that stock.
Reputable brokers provide written guarantees that they will fight the IRS on their dime if it ever challenges the client's transactions. An additional protection would be to get an outside tax accountant or lawyer to vet the setup and to privately apply to the IRS for a favorable opinion letter or "determination."