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Old 05-15-2008, 07:08 PM
 
2 posts, read 23,706 times
Reputation: 30
Default Use my 401K to buy a business

I am looking to purchase a business and I am reading that I can use my 401K funds without penalty to purchase a business. Has anyone used this type of service and does it work?
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Old 05-15-2008, 07:14 PM
 
Location: Houston, Texas
10,427 posts, read 28,717,398 times
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First I thought you were nuts so I looked it up. So you are right. That gives me an idea. See ya later, I have some research to do.

Good luck to ya on your new business venture.
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Old 05-16-2008, 08:27 AM
 
3,557 posts, read 6,711,281 times
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Leave your 401K alone. Pretend that money doesn't even exist.
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Old 05-17-2008, 08:12 AM
 
718 posts, read 1,984,395 times
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Quote:
Originally Posted by sean98125 View Post
Leave your 401K alone. Pretend that money doesn't even exist.

I agree. You would be foolish to use that money to open a business that could fail, very easily especially in this market. If you need to use 401k money to open a business, YOU CAN"T AFFORD IT!!!!
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Old 05-17-2008, 08:20 AM
 
Location: lumberton, texas
652 posts, read 1,751,017 times
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Quote:
Originally Posted by slynn41072 View Post
I agree. You would be foolish to use that money to open a business that could fail, very easily especially in this market. If you need to use 401k money to open a business, YOU CAN"T AFFORD IT!!!!
I 3rd that!!!!! That is a crazy idea that many have done and lost big time. that was with a better economy. Leave it alone, forget about it and find a new way to start the business in a few years when MAYBE the economy might be a tad better.
by the way slynn, you sound like Suze Ormand!!!!
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Old 05-18-2008, 07:04 AM
 
323 posts, read 1,385,520 times
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I 4th that....
With all of the govt/state sponsored loan programs, no need to tap the 401k.

"borrow as much as you can, for as little as you can, for as long as you can"
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Old 05-18-2008, 10:58 AM
 
Location: We_tside PNW / CO / SA TX / Thailand
10,806 posts, read 17,597,595 times
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I 5th keeping 401k (I do so for risk management, as the 401k is more shielded than IRA in a liability lawsuit)

There are very strict rules for using IRA $ for real estate and businesses (you would have to roll your 401k to an IRA, then use a third party intermediary to handle the transactions). I think they have significantly reduced the business side of this, and that it can't be your personal business, just as the IRA real estate can't be your personal residence. You can't have any distributions that would touch your investment + earnings AND you can't add personal funds to cover such things as maint, taxes.... Basically it needs to be a self supporting entity and is financially managed by a third party, similar to a 1031 exchange (you can't touch the dough). I found the fees of the limited parties offering this service to be a bit high. Some people have made a lot of $$ doing this, but I don't think it is the investor. (usually the people who put the investments together into a pool, or the management fees from that pool)

This book explains it, but some rules have changed since it was published.
IRA Resource Associates, Inc. - Book Info
The author is one of many who travel around the country doing presentations on this type of investments, and he is one of the many who tailor the investment pools.

Another option (If you have plenty of 'other' $ set aside for retirement) is to set up a Substantially Equal Payment Plan (72t) from an IRA, again you roll the 401k to an IRA (or several) and set up the SEPP which again has strict rules to avoid penalty. Withdrawal amount is based on your age, AND you must continue it for 10 yrs or until you are 59.5. You MUST not deplete the fund before final distribution or you pay penalty for ENTIRE amount. So... be careful how much withdrawal is set up based on the underlying investment return... a downturn in your investment performance could reduce the capital, which would in turn allow you to run out of money before you had completed the MANDATORY distributions. You would want to set up multiple IRA's to do this in an incremental manner (if needed) depending on your cash flow needs.

But the 401k is probably best left alone, and with the current CHEAP money I would look to loan options. And I would be very skeptical of most businesses as some have very high risk factors. For something that has a proven substantial cash flow and positive bottom line AND it is self supporting and managed, maybe it would be a good investment. I would never use retirement funds to buy a business that I would have to run or was responsible for its success. Passive income is a better use of investment $$. Consider your added value in finding bargains that can be resold at a profit, with nothing required from your part except the transaction and structuring of the investment. Don't buy a restaurant ! food joints most often run people into the ground within 2 yrs, I have painfully watched several tenants walk that path. It isn't pretty... I refused to sell a building to a tenant that was going to have to liquidate all their retirement $ to buy + re - mortgage their home. It is just best to keep retirement / personal funds separate from business funds. Only buy into something that is self supporting with a positive cash flow, and FUND your retirement accounts with the surplus, NOT DEPLETE retirement accts to fund the business. (in that case it is not a viable business)

Last edited by StealthRabbit; 05-18-2008 at 11:23 AM..
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Old 05-18-2008, 12:18 PM
 
4,892 posts, read 11,713,784 times
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i was wondering the same thing. what if you borrowed from the bank against an IRA? what do you think of that idea?
we want to open our own business, but i need help figuring out how to work things out:
working only a part time job with benefits included, but still having to pay for mortgage, food, utilities, cc/auto payments, living expenses and of course the loan.
i think we can get everything we need to open the business with 10-15k
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Old 11-16-2011, 01:45 PM
 
1 posts, read 10,766 times
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Quote:
Originally Posted by SPNARD1 View Post
I 4th that....
With all of the govt/state sponsored loan programs, no need to tap the 401k.

"borrow as much as you can, for as little as you can, for as long as you can"
I know this is an old thread - but it is relevant to my situation.

I completely understand the word of caution - but I'd like to add a spin / additional note of question.

What if the opportunity to buy the company that I have been at for the past 26 year presents itself? (and that is my situation) I have the operating capital to get things going... but I am seriously thinking about using my 401k to nd my down payment for the company.

As i said above, I have been there 26 years, the company has a mature customer base, and has been servicing a segment of the construction industry for over 35 years.

Would the fact that its a mature business and not a food joint sway any of your opinions?

I am very interested to read your feedback.

Thanks,
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Old 11-19-2011, 09:53 AM
 
24,596 posts, read 25,711,481 times
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Do NOT use your 401K money. Don't even think of touching it.
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