Can I use my retirement savings to start a business?
401(k) Plan Loan
If your 401(k) plan permits you a loan, you can borrow the lesser of $50,000 or 50% of your account value. The loan proceeds can be used for any pursuit, including starting a new business. You will have up to five years to repay the loan. Payments must be made quarterly, at least the prime interest rate, which stands at 4.75%. The benefit of using the loan option to finance a business is getting tax- and penalty-free use of your 401(k) savings. Also, you avoid paying a higher rate with an outside lender, and the interest is paid back to the plan. Yet, you are limited in the amount of money you can borrow, and if your 401(k) balance sits at $50,000, you can only get half that amount — not exactly a lot of money to work with. As with the taxable distribution, any fund borrowed from the plan will not be earned from other investments.
You can use your retirement money tax- and penalty-free through the Rollovers as Business Start-Ups (ROBS). No limits apply to the amount you may use. You can personally be involved and take a salary without breaking any prohibited transaction rules. The ROBS option involves the following sequential stages:
1. An entrepreneur launches a new C Corporation.
2. The C Corporation assumes a 401(k) plan, which can invest in company stocks, referred to as “qualifying employer securities.”
3. The entrepreneur rolls over or transfers funds from their retirement plan into the 401(k) plan.
4. Then, the C Corporation’s stock can be bought at fair market value.
5. And ultimately, the sale of the stock generates the capital required to fund the business.
You must use a C Corporation when setting up a ROBS. You can’t use a limited liability company, sole proprietorship, or any other kind of entity. The drawback of the C Corporation is double taxation.
First, the business gets taxed, and then the shareholders also get taxed. The question is, which is suitable for you? Each of these concepts has positive and negative aspects. Many factors go into choosing which path to take, including how much money you have and require, where you keep your money, and your age. But if all other choices seem out of reach, looking at your retirement savings may supply the boost you require to go from an employee to call the shots as the boss. You should consult with a licensed professional for guidance concerning your particular situation.