Startups

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

  • 4 min Read
  • December 10, 2021

Author

Escalon

Table of Contents

Do you want to start a business but don’t have the funds or investors biting on your brilliant idea? If that’s the case, you may want to look at borrowing money from your 401(k) fund. This can prove a viable option as long as you understand the risks and have a strong repayment plan in place. 


 Consider tapping into your 401(k) for starting a business if:



  • 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



Setting yourself up with rollover for business startups is complicated and includes future risks. So, before you use your 401(k) to start your business, weigh these pros and cons:


Pros:


  • 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.

Cons:


  • 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)



“The unfortunate reality is that most business owners will initially have to fund their businesses from their own pockets,” says Mike Sims, owner of ThinkLions, who funded his business from his 401(k) account. He adds, “For most working individuals, their 401(k) may be the single largest asset that they have and their only option for funding the launch of their business.”


Fortunately, aspiring business owners can use an arrangement called rollovers as business startups to fund their business using their 401(k), without being assessed taxes or penalties.


In the term ROBS, “rollover” refers to the process of moving retirement funds from one 401(k) account to the new company’s 401(k) account, and then from the company’s 401(k) account to the company’s checking account.


Here are the steps to complete a ROBS:


Step 1: Form a C Corporation

– If your business is already registered as an LLC or other entity, you will need to reorganize.


Step 2: Create a retirement plan for your new business

– Choose the right retirement plan, depending on the number of employees and how you will compensate them.


Step 3: Transfer funds to your account

– Rollover funds from your old retirement plan to the new one. The plan administrator will be able to assist you in this process.


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

– Use your retirement funds to buy stock in the corporation.


Step 5: Invest in your company

– Use the funds to invest in your business as per your industry rules.


Note: Whether you put the entire rollover into the hands of a financial services provider or do it yourself, you should consult a professional who can advise you based on your individual situation. A financial services provider that administers ROBS can help you stay on top of regulations and facilitate the process.


Tips to consider before using retirement funds to open a business



Here are a few key strategies to open a business using a 401(k) loan:


  • 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. 

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

People Management & HR

5 Key HR Challenges to Address Before Summer to Keep Your Team Engaged

For many startups, the summer months can be a dual-edged sword. On one hand, warmer weather and looming vacations can...

Read More
Taxes

How to Maximize Your Tax Deductions: Essential Tips for Startups in Q2

Tax season often triggers stress and complexity—especially for startups laser-focused on building products, acquiring customers, and scaling operations. Yet savvy...

Read More
Startups

Mid-Year Financial Checkup: How to Assess and Adjust Your Startup’s Budget 

The halfway mark of any given year is more than just a date on the calendar; it’s a valuable checkpoint...

Read More
Consumer Goods

Inventory Accounting 101: Navigating Costing Methods and Their Impact on Financial Health 

For consumer goods companies, managing inventory efficiently is critical—not just for operations but also for financial health and risk management....

Read More
Technology & Security

Compliance Considerations for SaaS: Protecting Data and Staying Secure

As more businesses transition to Software-as-a-Service (SaaS) solutions, data security and regulatory compliance have become top priorities. From handling sensitive...

Read More
Accounting & Finance

How Outsourced Accounting Supports Scalability in Portfolio Companies 

For portfolio companies, whether backed by private equity, venture capital, or family offices, scalability is essential for maximizing value and...

Read More
Consumer Goods

Insights from a Consumer Goods Expert: Building Brands, Inventory Management, and the Power of Outsourcing

Insights from a Consumer Goods Expert: Building Brands, Inventory Management, and the Power of Outsourcing  In a recent conversation with...

Read More
Private Equity

The Key to Private Equity Success: Strong Financial Oversight and Compliance

Private equity deals are becoming larger and more complex, making financial preparation a critical part of the process. Take Novartis’s...

Read More
Accounting & Finance

Navigating Grant Management and Financial Reporting for Biotech Startups 

Biotech startups operate in a unique financial landscape, where securing grants, venture capital, and government funding is crucial for driving...

Read More