How To Use Your 401K to Start a Small Business

The money in your 401K is reserved for your retirement years. But if you are starting a business and you have no enough money for it, you can withdraw a small portion of your savings as a startup capital. Some people go this route thinking it is better to use their own money than to get help from a financial institution. But although it looks like a feasible option, be reminded that early withdrawal comes with penalty fees and taxes. This is why you need to plan very carefully. Here are some tips that can help.

  • Calculate the amount you need. Everything that you need to start a business—rent fees, equipment and machines, raw materials, stocks, etc—must all be listed and summed up. This way, you know exactly the total amount you need and the amount you have to take from the retirement savings. If you have other financial sources, you need to take them into consideration when calculating how much you should withdraw.
  • Talk to your financial adviser. If you are really serious about prematurely using the funds of your 401K, you better have a consultation with your financial adviser. Talk to him about the pros and cons both in the short-term and long-term levels. You might even want to ask him if using the savings will work greatly to your advantage.
  • Find out about BORSA. Business Owner’s Retirement Savings Account, or BORSA, is a plan with which you can use the 401K account without being subject to penalty fees and taxes. In other words, the amount you get from your retirement plan is not counted as debt but as investment money. Talk to the financial institution that keeps your 401K about this.
  • Understand the risks. Withdrawing from the 401K to put up a business has risks. For one, you will have to deal with taxes when putting the money back into the account. For another, you might have to sacrifice a portion of your own money in case the business doesn’t turn out as good as you plan it to be. So make sure to carefully consider the 401K option. If you have to make a long list of advantages and disadvantages, please do so.
  • Accomplish the forms. If you are certainly sure you want to use your retirement savings plan for a business, talk to the financial institution that holds your 401K. You will be given forms to fill out. If you need some assistance in filling out the forms, or just in case you need someone to shed a light on some of the stipulations, contact your financial adviser.
  • Get the money. After all the paperwork, the financial institution will send you the money. This is typically five working days after submitting your forms. To avoid penalties, you need to replace the money within a 60-day period.

Money experts believe that withdrawing from the 401K is not always the best option, especially if you are nearing the retirement age. So take this route only if you have no other options left. In any case, government grants are available for a startup business like yours.


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