Using your 401k to Fund a Business

Before taking the risk of tapping into your 401k to launch a new business, you need to address the risks involved with the undertaking. If you use your retirement money to finance your plan and the business fails, the long term financial damage can permeate to the core. If, however, the business succeeds not only will your 401k be intact but you will experience the perks of being self employed.

The strategy of using your 401k to fund a business launch not only comes with personal liabilities but tax risks as well. The existing tax code is filled with “self-dealing” rules that if not properly adhered to could cost the entrepreneur plenty of money in the form of taxes on the existing 401k (do not forget, that money is deposited on a pre-tax basis).

The key to using your 401k as seed money for your new business is by properly creating a proper employee benefit plan for yourself. According to both Michael Julianelle, the IRS director of employee plans, and Andrew Zuckerman, the IRS director of employee plan rulings and agreement, this can be done only if:

  • The new 401k is properly established and uses all the rules and regulations of all 401k plans
  • The business must be properly audited to asses its real value regularly

If you want to tap into your 401k to finance your own business you need to speak to tax specialists familiar with these strategies. By spending the time now to set up your business legally and to adhere to all the proper tax codes, you will help ensure that you are not burdened by heavy tax liabilities later on.

If the current recession is motivating you rise from the ashes much like the mythical Arabian bird known as the “Phoenix,” then you may be using that pink slip as a piece of note paper on which to jot down thoughts regarding launching your own business. Starting your own business is both an exhilarating and nerve wracking experience, especially when it comes time to finding the money to start it. However, your years of working at “Company X” strictly for the benefits, will finally pay off, if you are leaving with a 401k in your name.