Using 401K to Start A Business: How To Use It to Become Self Employed

Starting up a personal business is a challenging experience that involves much risk, a great deal of financing, and help from experts knowledgeable in the field of business ventures and especially in helping entrepreneurs.  Getting the financing needed to start a business is one of the greatest challenges, but there are ways to help get the financing needed by using your 401K.

Become Self Employed and Start a Business Using 401K

Choose Your Business Carefully

  • The type of business you decide to start is an important factor in your success rate.  Think of things that you enjoy doing and that you have some knowledge in the area.
  • Research your business ideas to see if they are feasible in your area as well as in its market niche.

Build a Business Plan

  • Putting together a business plan is very important in starting and maintaining a business.  The business plan will include all of your financial information including bank statements, tax records and contact information for bankers and other financial institutions you are doing current, past and future business with.
  • The business plan allows you to project the earnings for five, ten and even fifteen years down the road as well as the costs expected to keep the business running.  This is important if you are looking at getting investors, other than using your 401K, to help finance start up fees.

Consult the Right Professionals

  • To make sure that you will not incur any extra fees, taxes or other obligations, it’s important to consult professionals to advise you and put you in the right direction.
  • A tax attorney is important to make sure that you are transferring your 401K correctly so that taxes are not withheld.  They will also be able to help you in allocating the appropriate funds for the business.

Using Your 401K for Funding

  • Once you have done your research and have decided upon the type of business you want to start, it’s time to start up your own corporation.  Once you have set up a corporation, put yourself in the corporation as an employee with 401K benefits. Be sure that you set yourself up as an administrator so that you can have privileges and the ability to make decisions and invest the 401K.
  • When you are set up in the corporation as an employee with 401K benefits, you can then transfer – or roll over – your 401K into the new business.  This prevents you from being charged early withdrawal fees and other taxes that you would have to pay if you simply withdrew your 401K funds instead of investing them or switching them to another company.
  • Now you can use the 401K funds as seed money to invest in your new business.  The funds can be used as an investment to procure equipment, employee payroll and other seed monies needed for startup.

It is important to make sure that you understand the workings of the 401K before you use it to start up your own business.  Be sure to contact a tax attorney familiar with 401K investments first so that you are protected and do not get taxed for early withdrawal.

2 thoughts on “Using 401K to Start A Business: How To Use It to Become Self Employed

  1. Ruby Samuel Reply

    Please elaborate in a more simpler ways what is 401K? I need help of finance/loan to start up a small business. I need to start up from scratch.

    • JC White Post authorReply

      Dear Ruby,
      Can you please let me know in detail what exactly you are planning to start and what stage are you at now?

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