Especially as you're first starting a business and/or are in the early stages, oftentimes gaining access to working capital can be difficult. Many have thus found themselves considering using a 401k to this end. Below we break down ways in which you might turn to your 401k account to get money to fund your business endeavor.
You have a couple of different options when it comes to 401k's being used for business purposes: a traditional 401k and a ROBS 401(k/). Of these, most consider the ROBS the one that makes the most sense as this option does not accrue taxes or any additional interest fees. In other words, with this method, there are no immediate penalties.
If you are unsure of how your retirement plan taxes you and consequently have questions about eligibility for business use, you most definitely want to check with your account to get a better overall picture of how funds in a given account can be used and the rules associated with your particular plan.
If You Choose to Use a ROBS 401(k/)
With a ROBS 401(k/), the assets currently in a qualifying retirement account are rolled into a new or existing business. This is generally done with an attorney's help. Now, usually, if you take money out before age 59, you will have to pay income tax on those funds; however, with a ROBS the funds are put into your business and are thus considered an investment. You will though have to repay the amount borrowed from the account with interest.
Your business also must be set up as a C-corp so that shareholders can invest in it. A 401k is then set up for the business and you as the owner can now roll your accounts into the 401k of the company.
If Using a Traditional 401(k/)
If you are intending to put a significant amount into the business as this business will generally be your primary job, then the ROBS is the way to go. If on the other hand, you are keeping your day job and the amount being invested isn't quite as much, you may want to look at a traditional 401k. The amount you can borrow will depend on what your employer has stipulated regarding withdrawals and also you must take into account that the IRS only allows you to withdraw up to 50k.
Again, this needs to be paid back with interest. Using your traditional 401k for funding your business is ideal if you require less than that 50k amount, aren't planning to work for your new business full time, and ultimately can repay the amount borrowed in less than 3 months.
There are a variety of options out there for business funding. First Union Lending offers several ways for small business owners to get access to working capital. Call today to see how we can help you!