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Using Your 401K to Start a Business

Nov 29 2011

There are many people these days who would like to consider starting their own business. Whilst some people may think that now is the worst time to consider starting a business due to the economic fragility and turbulent financial climate, others believe that now is the perfect time to consider this due to the uncertainty over employment, job losses and pay cuts.

However, no matter how keen and eager you are to start your own business, one of the things that is likely to pose a challenge for many people is finding the money to start up your own business. Of course, the amount of money that you need to start your own business will vary depending on the type of business that you plan to start, what you already have versus what you need, and what is involved in setting up e.g. renting premises or buying equipment.

Some people who are keen to set up their own business but are struggling to find the money to do so decide to tap into their 401K retirement account, which enables them to fund their start up business themselves either in part or in some cases in full. Of course, using your 401K account is not a decision that should be entered into lightly as you have to bear in mind that you could be putting your retirement fund at risk. However, it can be an effective option for those that are struggling to get the money elsewhere.

It is important to look at all of the options that are available to you before you make a decision to use your 401K account to start a business. You may find that you are able to get investment or a small business loan from the bank, which may be a more viable option for you. It is also worth considering advice from a tax expert with regards to opting for a BORSA (Business Owner's Retirement Savings Account) as it could mean avoiding IRS penalties.

If you decide to go ahead with using your 401K account to help fund your business you will need to contact the administrator to request withdrawal of the funds. There may be withdrawal penalties that you can avoid if you have a child that you are sending to college, you are paying large sums of money on medical expenses or you are buying a house. It is worth bearing in mind that you can also avoid the penalties if you repay the money that you withdraw within sixty days. This is good news for those that may only want the money on a short term basis due to a temporary cash flow issue.

Andy is a financial writer and blogger. He blogs daily on everything from loans and mortgages to savings and investments.

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