Should you take money from your 401(k) to get your new business off the ground?

• You cannot qualify for a business loan due to credit issues or time constraints.
• You intend to stay at your job while starting your business.
• You have a solid repayment plan.
• Your business requires less than $50,000. According to IRS rules, the maximum amount you can take from your 401(k) plan is 50% of your vested account balance or $50,000, whichever is less. 
• Your retirement plan qualifies, and the administrator of the plan must allow it. It cannot be a Roth 401(k), for example. 

Pros and cons of using your 401(k) to start a business

• You can use your 401(k) to fund a business without paying taxes (more on this below, in the “Robs” section)
• You can start a business without debt.
• You will have immediate equity that you can sell or borrow.

• You may be liable for taxes and penalties if the rollover is not completed.
• You will be subject to legal, accounting and administrative fees.
• There will be future risks. If the business fails, you could lose your entire investment.

How to finance your business with a 401(k)

Step 1: Form a C Corporation

Step 2: Create a retirement plan for your new business

Step 3: Transfer funds to your account

Step 4: Issue stock (ownership shares) in the new entity

Step 5: Invest in your company

Tips to consider before using retirement funds to open a business

• Determine in advance when you expect to make a profit or make up for the borrowed money from the 401(k) fund.
• Start lean to keep your expenses low.
• Ensure you have found your niche.
• Consider the best-case and worst-case scenarios. Evaluate how each will affect your overall finances.
• Have a backup plan. 

Authors

sayam