Use Your 401(K) to Start Your Own Business

(Newswire.net — June 30, 2020) Sydney, NEW SOUTH WALES — 

Options for 401(k) Business Financing

There are three popular options for financing a business venture using 401(k) contributions; a 401(k) business loan, a ROBS (Rollovers for Business Start-ups) Plan and a cash distribution.

401(k) Business Loan

A 401(k) business loan may be the ideal option for those who are planning on continuing their current employment, are looking to borrow less than $50,000 and whose retirement plan offers provisions for accessing a loan from the funds. While you do pay interest on a 401(k) business loan, the interest paid is put back into your retirement savings plan, making this a popular option for many entrepreneurs looking to top up their business funding. The only issue with this type of business loan is that it requires you to remain in your currently employment. Should you lose your job, you will have to pay back the entire loan amount within 2 months of ceasing employment. If you keep this in mind and have confidence in your job, then this may be a simple option for venture funding.

Some of the benefits of a 401(k) business loan include lower interest rates, few or no taxes or penalties on the money borrowed and, should you default, your credit history will not be negatively affected.

ROBS Plan

A ROBS plan is another way to access your retirement funds. In contrast to a 401(k) business loan, with a ROBS plan, you cannot use funds from a retirement account that is connected to a current employer. This gives the user greater flexibility to leave current employment and work full-time in the new business venture.

While ROBS plans offer more flexibility regarding employment, they tend to be a little more complex to set up. A ROBS plan requires the owner to structure their new company as a C-Corporation into which you set up a new retirement plan, then rollover your funds.

Two of the main differences between a 401(k) loan and a ROBS is that the ROBS requires you to borrow a minimum of $50,000 and you cannot pay the business owner’s salary from the fund set up in a ROBS. With a ROBS, users pay a start-up fee of a few thousand dollars as well as a monthly administration fee of a few hundred dollars.

Another significant difference of a ROBS to a 401(k) business loan is that the ROBS is not considered a loan. It is a rollover amount that is invested into the new business, so is not considered to be a debt to be paid back.

Cash Distribution

A cash distribution is another option some consider if they are unable to work out a 401(k) business loan or a ROBS plan. Most people who take a cash distribution are required to pay income tax on the amount along with a 10 percent early withdrawal fee unless they are almost 60 years of age.

There are numerous federal guidelines for taking out a cash distribution from your 401(k) retirement fund, so it is important to seek accurate advice when considering a distribution to start a new business.

Franchising to Supplement Your Income

Franchise expert Derek Cafferata works with many entrepreneurs who are looking to supplement their income with a new business.

“Franchising offers the ability for people to ease into a new business venture in the time that suits them,” says Derek. “Making the possibility of starting your own business a reality.”

Derek Cafferata and his team at All State Franchise Finders are able to offer the right advice and guidance for those looking to fund a franchise with 401(k) retirement funds. Derek Cafferata is a leading franchise expert with more than 30 years’ experience in the franchising industry.

For more information regarding 401(k) business funding options, contact All State Franchise Finders on 1-800-544-2161 or visit allstateff.com today.