Creative Funding For Small Businesses(?)
Posted on December 06, 2010 by Nathan R Mitchell, One of Thousands of Business Coaches on Noomii.
Nathan R Mitchell, Small Business Consultant, Tulsa OK, addresses the disadvantages associated with funding a new business with a 401(k)
Funding a small-business can be a difficult task, and an expensive one at that. Many aspiring entrepreneurs and small-business owners use credit cards, personal loans from friends and family, home-equity lines of credit, and personal savings. SBA loans are also popular for those who are able to qualify, but can be difficult to repay if a new business isn’t meeting its financial projections. Another option, although it may not be the most popular choice, is the use of 401(k) funds to finance a start-up company, but there are a couple of downsides:
1. Unfortunately, many startups fail within the first few years, so it may not be the best choice for funds that are earning interest in your retirement account, and…
2. If you are under the age of 59 1/2 and you withdraw the money outright from your account, you will owe taxes, as well as be required to pay a 10% early-withdrawal penalty.
When choosing this funding option, it’s important to seek expert counsel, because properly funding your business with money from a 401(k) account is not as easy as going to the bank and cashing a check, and there are legal steps that need to be considered.
Although it is possible to roll money from your existing 401(k) into a corporate retirement account that permits you to invest in the corporation, it is considered by many tax experts to be a gray area within corporate tax law. Essentially, the owner of the corporation is using money from his/her retirement account to buy shares of the business.
When choosing this route it is also not uncommon for financial advisers to charge significant sums of money for their services–so, depending on how much money you have in your 401(k) you could end up paying as much in fees as you would in taxes and early withdrawal penalties. This essentially results in a financial “wash.” A “wash” that could be well worth not having to deal with the headaches that could be associated with taking the road less traveled that is lined with gray areas of corporate tax law.
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