If you have a full-time job, but want to start your own small business, you may find yourself in need of funds. If you cannot get approved for a loan from a bank, you can consider a 401k loan from your retirement plan. You are automatically approved for a 401k plan loan, and although you make repayments with interest, it is deposited back into your account. This allows you access to funds, but poses the danger that if you do not repay it, you will face taxes and penalties.
1. Ask your 401k plan administrator if your 401k plan permits loans. Your plan may choose not to allow loans, in which case you can't borrow money for your small business.
2. Request a distribution for no more than the smaller of $50,000 or half of your 401k plan vested account balance. For example, if your 401k plan account balance equals $150,000, you could take out a loan of up to $50,000. Your employer may allow you to phone in your loan request or may request you to complete paperwork.
3. Use your 401k plan loan for your small business. No record keeping is needed because the IRS does not impose any restrictions on how you can use loan proceeds.
4. Make payments as scheduled on your 401k plan loan, or sign up for payroll deductions if your employer offers them. If you sign up for payroll tax deductions, you do not have to worry about accidentally missing a payment. If you do not repay the loan, you must pay income taxes on the remaining balance and a 10 percent early withdrawal penalty unless you are older than 59 1/2.
- Leaving your job makes the remaining amount on your 401k loan due immediately. Failure to repay it at that time causes the IRS to treat it as an early distribution.
- Jupiterimages/Creatas/Getty Images