You may have a significant amount of cash tied up in your 401K. Can you use your 401k to buy a business? The short answer is yes. The long answer is complicated, and it may take specialists and lawyers to make sure you escape possible penalties.
Can you afford to risk your retirement savings? That’s really what you are asking when you ask can I use my 401K to buy a business. Here’s some information to consider as you decide your best course of action.
Rollover as Business Startup
To use your 401K without incurring big penalties, a specialist will use a transaction known as ROBS or rollover-as-business-startup. This allows the owner to use retirement savings without the penalty imposed on those under the age of 59.5.
Essentially you are moving your money from a group of publicly traded stocks to a single company, yours. It brings many risks with it. Furthermore, although this process has been deemed legal, there are occasional challenges to its validity under federal tax laws.
Pros and Cons of ROBS
ROBS allows you to start, buy or franchise a business without going through a difficult loan process. It is possible that if you use your 401k to buy a business, you will be debt-free. This appeals to many self-starters.
On the flip side, ROBS doesn’t allow you to pay yourself out of the money. This means you will have to have your own income to sustain you until the business can pay your salary. Furthermore, the U.S. Bureau of Labor and Statistics serves up data that shows the downside of this idea. One out of two businesses die by year five. At ten years, the survival rate is 1 out of 3.
Proponents claim that the lack of debt, due to ROBS, will counter those statistics and make it more likely that a company will succeed.
Determining Your Odds
If you’re still asking how to use your 401K to buy a business, you need to have a handle on every aspect of your business. Consider these discussion questions and talk the answers over with an unbiased business consultant. The CollinSBDC offers strategic business consulting to help you with big business decisions.
When it comes to 401K funds and ROBS, you deserve as much information as you can get. Start by talking to the highly qualified Business Advisors at Collins SBDC. We are invested in helping your business venture succeed.