Using your 401(k) to fund your cake business

Using your 401(k) (or other retirement account)

In many cases, 401(k) savings can be used for small business start-up costs without being penalized for early withdraw or higher tax rates. Using your retirement to finance your business is a risk only you and your financial advisor can make, understanding that many businesses fail within the first year. However, many businesses fail because of a lack of capital; so, if you have a good business plan and just need the money to make it happen, it might be a worthwhile risk.

Since other lending options can come with as much risk as using 401(k) savings, it’s often a very attractive choice. Not only do you avoid having to qualify for commercial lending or commit your personal assets to guarantee the loan, but you also avoid having to give up control to an investor.

There are two different ways you can use your 401(k) savings to start your business. In one method, the process is similar to taking a loan against your 401(k), but the maximum cash you can take is $50,000 or 50% of the balance of your 401(k), and if you default on the loan repayment, you’ll be nailed with the extra taxes (unless you are over the age of 59½).

The other method may require the assistance of a CPA or tax attorney who is familiar with the ROBS loan (Rollovers as Business Start-Ups). In this method, a firm will help you create a 401(k) plan for your new business using the funds from your old 401(k). The 401(k) then purchases stock in the company, furnishing you with the start-up capital you need.

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