Interesting question. It was posed in a recent article in Entrepreneur (online). They suggest that you might be able to borrow against a 401-k to begin a business, at a reasonable interest rate. I’m not sure how that works, since you would have to borrow against (in many cases) investments that might lose value.
The other potential problem with borrowing against a 401-k is that if you lose your job, you would have to pay back the money immediately. So this strategy wouldn’t work if you’re thinking of quitting and going into your new business full-time.
If you cash in your 401-k, you might be able to get a break on interest (but not the penalty for early withdrawal), unless it is a “hardship” withdrawal. (Read this Q&A for more inforamtion.) But, if you stop working to start your business, your income will probably be lower, so it might make sense to take the hit now. But you really need to talk to your CPA before you do anything! Think about all the effects, including interest, penalties, and, most important, the effect of these actions on your future retirement income.
Tags: 401-k, baby boomers, financing a business startup, starting a business
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