In order to finance your new small business, you have used up your savings, tapped friends and family for cash and applied for traditional bank loans and even a home equity loan. Yet still, you do not have all the funding you need. There may be another possible option: pull out capital from your 401(k) retirement fund. Although not without risks, this plan has been used successfully by others and maybe the solution to your cash flow needs.
How It’s Done
To be able to legally use the funds from your 401(k), you must first incorporate your business and open a new corporate 401(k) retirement account. Then your existing personal plan can be rolled over into the new one without experiencing any tax repercussions. Then you can use the money from the corporate 401(k) to invest in shares of your small business and can then use that money for working capital for the business.
Using your 401(k) can be a good thing if you have a backup plan, like having a home to sell or a second income within your household. If you have a significant amount saved up in your 401(k) it can provide all the cash you need to really get your business off the ground. You can start replenishing the account as soon as your company reaches profitability.
The main risk is that if the business fails you then have no savings for retirement and depending on your age, it could be difficult to save up enough again in time. Plus the process of creating the corporate 401(k) program can be so complicated that most people hire a financial advising firm to set it up, and then retain their services to make sure they do not run into any problems with the IRS. That can cost several thousand dollars initially and then hundreds every month thereafter. Because of the costs and risks many financial advisors counsel business owners to look everywhere else they possibly can for funding before turning to their 401(k) plans.