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How to Use 401(k) Funds to Start a New Business

Jun 13 2011

The way to do this is through a little known provision called the Rollover as Business Startup (ROBS). This tax code provision allows people to launch new business ventures with old funds in their 401(k) account without having to incur those nasty early withdrawal penalties (which were of course put in place to stop people treating 401 like a bank account). Obviously doing all this requires the services of an accountant and they would be the best people to advise you on such a move, but before you talk to them, consider this question – does using your 401(k) funds make sense to you? In reality there are only three really good times that you should do this.

Firstly, if you have the single greatest business idea ever. Is your business idea a winner? Is it unique, well thought out, do your friends, family and even people who hate you have to admit that it is a great idea? Does it need start up capital that you don't have and can’t get? Will someone else do it if you wait? Are you prepared to bet your retirement years on it?

Secondly, it is plausible to use your 401(k) if you are taking your life in a new direction and starting again. Perhaps you have quit your job to follow your dream, or you have been fired and need to retrain. Perhaps you have tired of office life but have enough belief in your skills to branch out on your own and go freelance? In that case you could call on your 401(k) funds to get yourself and your new career up and running.

Lastly, it would be better to draw on your 401(k) than get yourself into massive debt. If you’re going to pursue your dream or your business idea no matter what, then don’t end up accumulating massive debts on credit cards, overdrafts and payday loans. Instead, look into either taking some equity out of your house, or, if you cant do that, using those 401(k) funds.

It is worth stressing one more time that touching those retirement funds is not for the faint hearted. But then neither is starting a new business!

Alex is a journalist and financial blogger. He loves to write about cricket and jazz but these days seems to be mostly writing about mortgages and payday loans.

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