Should You Tap Your 401(k) to Start Your Business?

Five Years Later

Five Years Later
What happens to Entrepreneurs who use their retirement funds to start businesses? To find out, we caught up with four Entrepreneurs who had used their nest eggs to launch franchises in the mid-2000s. Here's what they did and how it turned out. --J.B.

Entrepreneur: William Mitchell, Charlotte, N.C.
In 2005:
Took $200,000 out of his 401(k) plan to help pay for his Primrose School at Eastfield Village, which provides day care and after-school programs for 170 children.

In 2010: "Our school is full, with waiting lists, we're profitable, and my wife, Polly, and I are having fun," Mitchell says. "If I'd left my 401(k) alone, it would have been devastated in the stock market in 2008, just like everyone else's."

Entrepreneur: Darwin Seim, Portland, Ore.
In 2005: Withdrew the entire $400,000 in his retirement accounts, combined it with $600,000 he'd earned from selling another business and opened a Mr. Transmission auto repair franchise.

In 2010: Seim closed his shop in 2008--"We never had a profitable day," he says --and filed for bankruptcy this spring. "We spent all the money we had," he says, "and at age 55, I'm a working guy again. When you're putting your retirement at risk, don't be in a hurry to start a business. Make sure you're getting a good value for your money."

Entrepreneur: Renee Colwell, New York
In 2005: Invested $100,000 of her 401(k) in CMIT Solutions, a small-business computer support franchise.

In 2010: Colwell sold the business to a competitor 18 months later. "I made a little profit," she says. "Was this wise from a financial point of view? It was a lot of risk and my 401(k) is probably worse off than it was before. But I would do it all over again, because I learned what owning and running a business is like."

Entrepreneurs: Nelson and Lisa Neyer, San Clemente, Calif.
In 2005: Used all the $85,500 in their retirement plans to start a Bark Busters franchise. "I couldn't tell my dad until four years later that we'd cashed out our retirement savings," Lisa says.

In 2010: Their franchise is profitable, and "we have no debt, because we paid cash for everything," Nelson says. The Neyers have other savings, and Nelson says they "should be able to sell at a nice profit when we're ready to retire."

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Julie Bennett is a freelance writer.

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This article was originally published in the July 2010 print edition of Entrepreneur with the headline: Should You Tap Your 401(k) to Start Your Business?.

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