Can I Borrow From My 401(k) to Start a Business?
Yes, you can borrow from your 401(k) plan to start a business, but only if your program administrator allows you to take out a loan. It’s important you know how much you can withdraw. According to IRS rules, the maximum amount you can take from your 401(k) plan is 50% of your vested account balance or $50,000, whichever is less.1 So, if you have $80,000, you can take up to $40,000 in a loan.
If you leave your job and your loan isn’t paid off yet, you’ll still be required to make the remaining payments. And if you’re younger than 59 ½ and don’t pay your loan back in time, the money will be considered an early withdrawal. This means you’ll have to pay a 10% penalty, plus income taxes on the amount you took out.
How to Borrow From 401(k) Accounts
Things to Consider Before Borrowing From Your 401(k)
Don’t forget to read your 401(k) plan’s fine print. You may also want to think about:
- What your retirement funds will look like if you take out a loan to start a business, but are not successful.
- Whether losing out on tax-advantaged growth in your 401(k) is worth getting a short-term loan.
- If you’ll still be able to make plan contributions if you take out a loan.
- Making sure you can afford to make loan payments. If not, your loan will count as taxable income and you’ll have to pay a penalty for an early withdrawal.
When you think about it, you may realize you’d be better off getting a low-interest loan from a bank or other financial institution instead.
Alternatives to a 401(k) Loan to Start a Business
Cashing out your 401(k): If you’re 59 ½ or older, you can start taking money out of your 401(k) without paying a penalty. You will, however, have to pay income taxes on the money you take out. This may be better than having to make regular loan payments with interest, though.
Rollovers as Business Startups (ROBS): If you have over $50,000 in your 401(k), you may be able to use the money to invest in your business. While ROBS aren’t a type of loan, you still have to meet certain requirements to get them, like being an employee of the business. Setting up this funding can be complicated and costly because you’ll need to find a provider. This type of financing does affect your business’ structure, so make sure you know how it can impact your company.
Small Business Administration (SBA) loans: The SBA works with lenders to provide loans that can help you start or expand your business. These loans can offer unique benefits, like lower down payments or no collateral. You can visit the SBA's website to find lenders in your area.
Personal loans: If you have a good credit score, you may consider getting a personal loan. These may offer better interest rates and terms than taking out a loan from your 401(k) plan.
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