Using Your 401K to Fund a Startup

Written by: Mike Valles

Getting your new business started will usually require considerable money to do it. One way that many people are using today to obtain the initial funds to get their business underway is to take their 401k and use some or all of their funds in it. While this is permissible by the IRS, you need to know that there are certain rules that apply.

Two Ways to Use Money from a 401k

The money in your 401k is available for your business startup in two forms. The first, according to MySolo401k.net, is to get a participant loan from your 401k plan. When you use this form, you can only get access to a maximum of 50 percent of the money in your account, with a maximum of $50,000. In addition, you will also need to have regularly scheduled repayments made back to the account.

The other option is to take a rollover as business startup (ROBS), from your 401k. Although this process is a little more complicated, it clearly has some benefits not available from taking out a loan.

Steps to Fund Your Business Startup with a ROBS

According to Harvard.Edu, it will be necessary to form a C-Corporation that adopts a new 401k profit sharing plan. You will then transfer the money from your 401k to it as an investment by purchasing common stock in the new company. Although other rules may apply, these general steps will help you to transfer the money without any tax penalties.

Advantages of a ROBS

There are several advantages to taking the rollover option rather than the loan from your 401k. Although it will cost you to pay for legal counsel and help, it will still be a low cost way to get the money you need. According to Inc.com, if you choose to get an SBA loan, it will be necessary to put down 25 percent first. It will also be necessary to use your home as collateral.

Other advantages in using money from your 401k include the fact that you will not need to have a credit check, and no loan payments need to be made. You also stay in charge of your business because you will own the controlling interest in the stock, and get the largest share of the profit, says MySolo401k.net. Besides that, you will not have to use any of your possessions, such as your house, as collateral on the money.

Important Considerations Before Using Your 401k Money

Before you take the step of putting your retirement money into your new business, the Wall Street Journal warns that there are some serious considerations you need to think about first. For one thing, if you do it wrong, and you are under 59.5 years old, you may be subject to hefty taxes for making a withdrawal too soon. It is also advised that you seek legal or financial expert counsel beforehand to avoid any unnecessary complications and to be aware of how to make the most of it. A third concern is that many new business startups fail, which could easily mean that your retirement money is depleted.

Taking your money out of your 401k could be just the way you need to finance your new business. Getting sound financial expertise to ensure it is done right is very important, and so is having a solid business plan, to help ensure your business startup is the success you want it to be.


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Using Your 401K to Fund a Startup

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