How to Finance a Business With 401(k) Funds

Withdrawing money from a 401(k) plan involves numerous restrictions and potential consequences. There are several ways this can be done, to achieve the goal of withdrawing money to invest or start a business. The most important considerations are that 401(k) plans allow certain withdrawals for certain reasons only, and depending on your financial circumstances, this can be a relatively easy way to achieve the goal. In addition, other considerations include the fact that certain withdrawals carry tax consequences, special penalties and suspension from participation in the plan for a period of time.

Instructions

Things You'll Need:

• 401(k) plan document
• Computer
• Internet connection

401(k) Withdrawls

1. Step 1

   Research the plan provisions and rules. You can obtain the plan document, and summary plan document from your company's 401(k) website. The website address would be provided to you on your quarterly statement that is mailed to you.

2. Step 2

   Determine the withdrawal options for which you are eligible. First is a loan, the maximum allowed is $50,000 or 50 percent of you account balance, which ever is less. This can be used for any reason and carries no tax consequences. If this is enough money, this is always the best solution.

3. Step 3

   Look at other in-service withdrawal options. There are typically two other options readily available a residential home loan and a hardship withdrawal. These funds can not directly be used to invest in a business; however, if you have access to another lender and also have this need then this option can help. To obtain a residential home loan you must be purchasing a primary residence, and to obtain a hardship withdrawal you must have a serious financial need, such as a pending eviction, medical expenses or tuition expenses. The residential loan carries no tax consequences, but the hardship withdrawal entails ordinary income tax, plus a suspension from participating in the plan for six months.

4. Step 4

   Examine other secondary distribution options. If you have rollover funds that you contributed to the plan from another 401(k) you can take that out without restriction. The consequence is that you will owe ordinary income tax. If you are over the normal retirement age of the plan, typically age 65, you may be able to withdrawal all of your account while still working. This may be difficult to determine without asking your plan administrator. The plan document will have a phone number you can call.

5. Step 5

   Determine if any normal distribution events have or will occur. Leaving the company, or becoming disabled would allow for a partial or full distribution. These distributions will carry the ordinary income tax plus a 10% penalty if you are under age 59 1/2. All of these options should be considered carefully as they may have long term or unintended consequences.