Use my 401K to buy a business (fees, mortgage, borrow)

[65hdfan]

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?

[desertsun41]

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.

[sean98125]

Leave your 401K alone. Pretend that money doesn't even exist.

[slynn41072]

Originally Posted by sean98125

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!!!!

[emailvasally]

Originally Posted by slynn41072

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!!!!

[SPNARD1]

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"

[StealthRabbit]

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)

[findinghope]

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

[Stow5931]

I was reading through many of your posts above and felt I should point out an additional option for financing that is also available.

I work for a company called Guidant Financial Group and we help individuals throughout the nation invest their retirement funds into a start-up businesses, existing business purchases and franchises. The program we offer is accomplished through a Corporate/401K structure where the individual is rolling over their existing retirement funds into a retirement plan tied to a company they would own and operate. This 401K plan allows them to make a one-time investment into their company to provide the company with operating capital for their business expenses.

If you are interested, you can research this option through our website at Small Business Financing | Self Directed IRA - Guidant Financial Group You can order a free info packet online and there are numerous resources on the website (audio presentations, articles, slideshows, etc.) that explain the program. If any of you are interested in having a conversation about this financing option you can also reach me directly. Guidant's toll free line is 888.472.4455 and ask for Jeffrey Stowe.