How to Purchase a Business With 401(k) Money

People are increasingly looking for new ways to finance a business. One method that is growing in popularity involves using your 401(k) funds. There is the right way to do it so you don't run afoul of the IRS. Follow these tips to avoid losing your 401(k) funds to taxes and penalties while starting your own business.

Things You'll Need

• Your 401(k)
• Lawyer
• CPA

Instructions

Roll over Your 401(k)

1. Form a corporation. Decide whether it is a sole proprietorship, partnership or LLC--a limited liability company. Now is a good time to engage the services of a lawyer and certified public accountant.

2. Set up a 401(k) plan for your corporation. Set up the plan yourself if you know how, or consult a professional or financial institution--such as a bank, mutual fund provider or insurance company--to help you establish and maintain the plan.

3. Roll over your existing retirement funds to the new 401(k) plan.

4. Use your new 401(k) plan to purchase stock in your corporation. You can set up your corporation so that you own all the stock. Your business is now debt-free and cash-rich from the sale of the stock. Now, your corporation can purchase your new business.

Tips & Warnings

• Run everything by your certified public accountant and your attorney to ensure you don't lose your rollover retirement funds to penalties and find yourself on the radar screen of the IRS.

• Be aware that not all new businesses succeed.

References

• Fund Your Business with Your 401(k)

Resources

• Fidelity