How do you invest in a personal business with a 401k?


Quick Answer

Investors can use their 401(k) funds to finance a personal business if the business is set up as a C corporation with its own 401(k) plan, according to Inc. It is necessary to roll other 401(k) assets into the C corporation's plan before investing, and the personal business must be defined as a valid investment for the new 401(k) plan as well. Once invested, the 401(k) funds are considered business funds and are available for any qualifying business expenses.

Continue Reading

Full Answer

One major reason for establishing a C corporation to use 401(k) funds as capital for a personal business is to avoid the significant tax penalties associated with early 401(k) withdrawals, according to Inc. The other primary reason for using the C corporation framework is that the S corporation and other corporate structures do not have the correct framework to support a 401(k) used for investment in the same business. Using a 401(k) as a financing mechanism can also help insulate a business owner from some of the risks of funding a business via small business loans. This is due both to 401(k) funds providing pre-tax dollars for the investment and the lack of credit implications if the money cannot be paid back. The downside to funding a personal business using 401(k) funds is that doing so usually eliminates a significant amount of a person's retirement savings if the business does fail.

Learn more about Financial Planning

Related Questions