Get Your Business Funded: Creative Methods for Getting the Money You Need

Using Your 401(k)

Of course, all of the caveats relating to tapping your IRA apply equally well here: Using your retirement funds to invest in a risky entrepreneurial venture should be a choice of last resort. It is not recommended. But yes, people do it, and you can too; just work to reduce the risk to the extent possible.

Here are your options:

Withdraw the money. As with an IRA, the same rules apply here. If you withdraw the money from your 401(k) before the age of 59½, you will have to pay a 10 percent penalty, as well as all taxes that have been deferred. Not a great plan.

Take out a loan against the account. Again, and not surprisingly, the rules are similar to those for an IRA, but with some significant differences. There are two ways to take out a 401(k) loan:

1. Roll it over into your new business. Because your old employer will not administer your 401(k) since you (presumably) no longer work there, you will need to incorporate a new business. The old 401(k) will become your retirement account in the new business. Once that happens, you can take out a loan against your new business's new 401(k).

The catch is that you can borrow only $50,000, or 50 percent of the account, whichever is less. Moreover, legally, you will need to repay the loan within five years, quarterly, and at a somewhat hefty interest rate.

2. Probably the better way is what is sometimes called a ROBS loan, and no, that does not stand for robbing Peter to pay Paul. A ROBS loan stands for Rollovers as ...