Tapping Retirement Funds To Start a Franchise

Even my overworked accountant told me that using retirement funds before you qualify is generally not a good idea. According to a recent article in the Startup Journal, this is because...

"...you'll pay a 10% penalty on what you permanently withdraw from a 401(k) account or traditional and Roth Individual Retirement Account (IRA) if you're under age 59 1/2. On top of that, you'll owe taxes on the withdrawal from the 401(k) and traditional IRA because those accounts hold pretax income. Income taxes are assessed on only the gains you withdraw from a Roth IRA because you've already paid taxes on your initial contributions."

Ah, but what my accountant didn't tell me was that there are ways to minimize penalties and taxes. Here's one... Moonlighters who start business can borrow from the 401(k) accounts. Borrow on it. Great idea!

"Moonlighters who start businesses while still working full time can borrow from their 401(k) accounts at no penalty as long as they pay it back within five years. Although company 401(k) plans can vary, many allow you to borrow up to 50% of the principal. Even better, you'll be paying yourself back with interest, "which might be better in this market" than the returns of the funds in your account..."

"Make sure you can afford the monthly payments on your loan to yourself. For instance, if you borrow $50,000, you'll be required to repay $10,000 annually, or $830 monthly. And if you decide to quit your day job because the business is going so well, be ready to pay off the entire amount before you resign or it will be reported as income."

A word to the wise is to speak with a KNOWLEDGEABLE accountant that knows how to minimize taxes and penalties from dipping into your retirement fund before your time. After reading this article, I think I need a new accountant...

Source: Startup Journal