Should You Drain Your 401(k) to Start a Business

The short answer is, no. No because you shouldn’t put all your eggs in your business basket, because it could fail.  However, your 401(k) is a good source of funds.

But, money.cnn.com ran a good article this week about using some of the funds, anyway.

The key is ROBS, or Rollovers as Business Startups. The key is that you don’t pay taxes on the withdrawn funds used to buy the business, or get hit with an early withdrawal penalty of 10%. We don’t know if ROBS applies to purchased businesses.

It’s imperative that you have self-direction authority for your IRA, too. Most financial institutions would not approve of the buying or starting of a business, under the Prudent Man Rule; they don’t want to get sued for bad advice.

Apparently, there’s only one financial management firm, Guidant, that will help you set up the business. Guidant charges $4995, plus $119 per month. That’s considerably more than our Entrepreneurship courses, which are available at www.theasoe.com. Solutions Forum will match the $119/month for online consulting, unless we have a licensee in your area.

We would not recommend buying the business outright, unless that’s the only way the owner will sell, because it’s a good idea to keep him/her around for a while, and it limits your risk. Use the 401 to make the downpayment, and have the business do an earnout, ie., buy itself with its own funds. Living owners are generally amenable to this idea, so they can spread tax liability. Estates, not so much.

You should consult the SBA, too, because they might lend you most of the purchase price.

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