Buying A Business With Your 401K Or IRA
Many potential business owners choose to use the retirement funds in their 401K or IRA's to buy a business. When buying a business with your 401K or IRA, there are many things to consider. If you are using the retirement funds before you have reached retirement age, there are penalties involved that you may not be willing to pay. If you have reached retirement age, you must be sure that the new business you are buying will provide you with the income that you expected your retirement fund to provide.
The first thing you must consider is the risk involved. If your business fails, you will not only lose the business, but you will have also lost the funds that you were depending on to secure your future once you were ready to retire, or unable to work. This is a risk that many potential business owners are not willing to take, especially if they have already reached an age where building their retirement fund back up to a secure level will not be possible.
Typically, the retirement funds in a 401k will only be available when a person quits their current job, or retires. However, you can choose to close out your 401k account without quitting or retiring. Unless you are at least 59 1/2 years old, there will be early withdrawal penalties and taxes that must be paid. You generally will not be allowed to borrow against your 401k to start a business, as 401k loans are required to be paid back within 60 days of leaving your job. If the purpose of the loan is to start a business, the administrators of the 401k program at the company that you work for will know that you plan to leave your job in the near future.
Since IRA's are usually administered through financial institutions, you may be able to borrow the money you need to buy a business, using the IRA as collateral, although this is rare. As with a 401k, there will be penalties and additional taxes that must be paid, unless you are 59 1/2 years old.
The income potential of the business you are buying is important. Depending on your age, the income you can derive from the business must be enough to pay the expenses related to the business, pay your current living expenses, and build your retirement funds back up to a comfortable level before you reach the age you wish to retire at. You should strongly consider the resell potential of the business. If you need to get out quickly, how soon can you sell the business, and what can you expect to get for it? If there is a chance that you will not be able to get out - at the very least - what you put into the business, you may want to look at other ways to finance the business, and keep your retirement funds intact.
However, if the business that you are considering buying will provide you with enough income to meet all of your expenses, build your retirement fund back up, and it has great resell potential, using your retirement funds to buy a business should be viewed as a reinvestment of the funds. You should consult with a financial adviser before making your final decision.
Click here to return to Buyer's Guide.