How to Use Your 401k to Start a Small Business

Starting a small business isn't hard, but finding money to start a small business can be a challenge. While small-business loans and investors can help, you can also tap into your 401k retirement account when starting a small business. Learn how to use your 401k to start a small business and self-fund your new venture.

Instructions

1. Examine all other financial options carefully. Can you get a small business loan? Find an investor? Withdrawals from your 401k risk your future retirement, so do not remove your money lightly.

2. Consider a BORSA plan. BORSA stands for "Business Owner's Retirement Savings Account," and in some instances, may help you to use 401k money without incurring IRS penalties. Consult a tax adviser before proceeding.

3. Contact your 401k administrator and request the withdrawal. If you are purchasing a house, sending a child to college or incurring large medical expenses, you may be able to use these instances to eliminate withdrawal penalties.

4. Return the money borrowed within 60 days and you do not have to pay penalties on the early withdrawal. Keep this in mind if your cash flow issue is short term and temporary.

5. Lend yourself the money if possible. A 401k loan can be easier in terms of taxes and penalties when funding a small business than a direct withdrawal.

Tips & Warnings

• Consult a tax adviser before taking any action.

References

• BORSA Plan (PDF)