How to Access Your 401(k) & Other Retirement Funds to Start a Business
Entrepreneurs must find the resources to fund a new business venture. Small-business loans or venture capital are elusive and hard to obtain without the right business plan, networking connections and personal background. Personal assets, namely retirement funds, then become one of the most significant business-funding sources available. Certain plans, like a 401k and 403b, may offer loans to plan participants that require no credit check and are without tax consequences. The Internal Revenue Service does not allow IRA loans or use of IRAs as collateral in any way. When loans are not feasible, a distribution is another method.
Other People Are Reading
Instructions
-
Loan
-
1
Write a business plan that develops the business idea, the target market and establishes the start-up costs needed to launch. It is imperative to review all needs and assess where your priorities are in start-up costs and the quickest avenues for return on investment.
-
2
Call the 401k plan administrator, and ask about 401k loan provisions. The IRS allows loans, but not all administrators do. You must remain employed with the company and make regular payments deducted from the payroll. The loan must be repaid within five years.
-
-
3
Obtain the loan application from the administrator. Complete the form requesting the minimum amount you need at that time. You are allowed to take more than one loan out at a time with the total loan value capped at $50,000, but not more than 50 percent of the 401k value.
-
4
Submit the form, and obtain the check. It takes approximately one week to process everything. Deposit the check, and use it for business operations.
Distribution
-
5
Call the retirement plan administrator or IRA custodian. Request a distribution form.
-
6
Calculate how much to distribute. Keep in mind that you will need to factor the 20 percent automatically withheld for an early distribution if you are not yet 59 1/2 years old. There is no limit to how much you can take out as a distribution.
-
7
Complete the distribution form, stating how much you need to take out to start your company. Select "Net distribution" so that the taxes and penalties are taken out but you still receive the total amount needed at this stage of business development.
-
8
Sign and submit the form. You can obtain the check within a week and deposit it, using it for business operations.
-
1
Tips & Warnings
Using an IRA as loan collateral may result in the entire IRA losing tax-deferred status. The account is considered distributed, added to gross income and penalized if the owner is not yet 59 1/2 years of age.
