If you’re thinking of buying a franchise, but realize you may require short-term or emergency funding, you may be able to take a loan from your 401(k) retirement account. 401K Rollovers, also known as Rollovers for Business Start-ups (ROBS), is a little-known method of financing that allows entrepreneurs to use their retirement funds to invest in a franchise without taking a taxable distribution.
Before making the leap, it’s important to look at all of your options so you don’t jeopardize your retirement money unnecessarily. First, you’ll need to know if your program administrator will allow you to take out a loan from your 401K and if there are specific use requirements. You’ll also need to know the amount you’ll need for your business and the maximum amount you’re allowed to take from your 401K. Another key consideration is how long you’ll have to pay back your loan. Be sure you can afford to make your payments. If you can’t, your “loan” will count as a “withdrawal” and taxable income, in which case you’ll need to pay penalties for the early withdrawal. After considering all of your options, you may realize you’re better off with a low-interest loan from a financial institution instead.
ROBS typically work like this:
- The aspiring business owner starts a new corporation.
- That corporation sponsors a 401(k) plan.
- The new 401(k) plan purchases stock in the corporation.
- Retirement funds are rolled into the new 401(k) to buy the business.
- Note: You must have at least $50,000 in retirement funds available.
In addition, there are many types of retirement accounts eligible for this structure, aside from 401(k)s: Keoghs, 403(b)s, TSPs, IRAs and SEPs also qualify. The only requirement is that you have current access to the account you want to draw from; so if that account is with your current employer, you’ll need to leave that job before you use those funds.
Also, when you use a 401K rollover to finance your business startup, you have the option to combine retirement funds with that of a spouse or business partner to maximize your total capital. It can be a great way to start a new venture completely debt-free!
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