A 401(k) is a tax-deferred retirement savings account. Many businesses offer 401(k) accounts to employees as a benefit of working at the business. When 401(k) funds, which are deducted from an employee's paycheck before the paycheck is taxed, are deposited, the plan provider invests them in businesses associated with the plan. If an employee wants to use his 401(k) account to fund his own business, he must set up a corporate retirement account and roll funds into it.
Corporate Retirement Account
You can't invest your personal 401k into a business. However, you can set up a corporate retirement account and roll 401k funds over into it to invest in the business. The business must be a Class C Corporation to open a corporate retirement account. Once the account is open, you can roll your funds over into it and use them to purchase stock in the company.
Opening a corporate retirement account can be risky. If you invest in a start-up or other business that doesn't do well, you can lose your retirement savings. In addition, if you set up the account incorrectly, the Internal Revenue Service (IRS) can charge taxes and penalties for early withdrawal of your retirement funds. See a tax adviser to ensure that you are doing everything correctly before opening a corporate account.
You can take a loan out against your 401(k) funds to invest in a business. Most 401(k) loans allow you to pay the loan back over five years. Your loan payments are taken right out of your paychecks each pay period until the loan is repaid. Since the loan is guaranteed by your 401(k) plan, it will usually be approved and the money released instantly. However, if you lose your job or stop contributing to your 401(k) for any reason, the loan will be immediately payable in full, and you can't take out a second loan if you have one outstanding.
If you don't want to risk your 401(k) funds, you can use other types of savings to finance a business instead. Save up six months worth of income in case of emergency and use a taxable savings account or brokerage account. You can also refinance your mortgage and take out a home equity loan to get investment funds. Finally, you can withdraw Roth IRA funds without penalty for business investment use, but you won't be able to put the funds back in your IRA if you recover them through your investment.
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