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Crack The Nest Egg?

Is taking money out of your 401(k) to start a business ever a good idea?
May 1, 2008
URL: http://www.entrepreneur.com/article/193284

Question: I'm thinking of tapping my 401(k) to start a business, but I'm concerned because I'm 52 years old and retirement isn't that far away. I also have two teenagers who are going to be starting college soon. Any advice?

Answer: Unfortunately, there's no easy answer to your question. If you take the plunge and tap your retirement plan for the cash you need to start your company, there's no guarantee that your business will generate a higher return than you'd get by keeping your money in the large-cap mutual funds it's probably in right now. On the other hand, trusting your money to the stock market may not be such a safe bet either, considering the wild swings in the financial markets these days. The reality is, there are many factors to consider, from legal and tax consequences to your personal risk tolerance to your family's short- and long-term financial needs.

Plus, taking money out of your 401(k) plan may not be as simple as you think. While you're still employed, you can only withdraw money from your plan in the event of death, disability or financial hardship. However, you can borrow up to $50,000 or 50 percent of the vested balance (whichever is less) and pay interest on the money at a rate of prime or prime plus 1 percent. Once you quit your job, you can roll over your 401(k) into a tax-free retirement plan such as an IRA, but you'll face taxes and penalties for withdrawals until you reach age 59 and a half.

Before you crack open your nest egg, Carol Vinelli, a business and transition coach, advises making sure you have enough retirement savings to cover expected healthcare needs as well as two years' worth of living expenses.

Rosalind Resnick, founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and emerging companies, is author of Getting Rich Without Going Broke. Reach her by e-mail at rosalind@abcbizhelp.com or through her website, abcbizhelp.com.