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The Pros & Cons Of Using Retirement Funds To Start A Business

It’s a common misconception that you can only use your retirement savings to purchase investments like publicly traded stocks, bonds or mutual funds. 

Actually, you can use most retirement plans to buy a business – tax-deferred and penalty-free.

While this is great news to those looking into small business funding options, you must still do your research and ensure you’re fully knowledgeable about both the benefits and risks of using these funds in such a manner.

Rollovers as Business Startups (ROBS) is the method of funding that allows you to use your 401(k), IRA, 403(b) or other qualified retirement account to fund a business without penalties, upfront taxes or debt. It can also be used as the necessary capital injection for a Small Business Administration (SBA) loan.

Before you commit to using retirement funds to start a business, though, here’s what you should consider:

The Benefits of Borrowing From Your Retirement Account

    • These funds are tax-deferred and penalty-free.
    • It allows you to open your business debt-free or with reduced debt. This can significantly shorten your time to profitability and maximize your potential success.
    • You will be able to pay yourself a salary from the start, enabling you to pay living expenses from your salary.
    • Since you aren’t taking out a loan, there are no interest payments or monthly repayment of loans to budget for.
    • Funding is secured quickly, typically in just three to four weeks.
    • Your business will gain cash flow and build equity faster without debt.
    • A debt-free start-up is a powerful wealth-building vehicle, and as a successful entrepreneur, you can build for the future and protect your profits.
    • This type of funding is not dependent on your credit score. You still qualify even if you have bad credit or bankruptcy.

The Risk of Using Your Retirement Savings

    • This option does not make financial sense if you haven’t accumulated more than $50,000 in your retirement savings account.
    • It involves ongoing administration to stay compliant, so it’s recommended that you hire an experienced provider.
    • This type of withdrawal must be carefully structured to comply with ERISA provisions and IRS codes.
    • It involves an obvious element of risk with your retirement savings if your business does not succeed.

Clearly, the option to borrow from your retirement account is one that should not be taken lightly, but it is one that has been found favorable by  many small business owners over the years. In fact, Benetrends has helped over 17,000 entrepreneurs fulfill their dreams of owning a business or franchise for over 35 years with the Rainmaker Plan® – a small business funding solution that allows you to borrow from your retirement account and open a business, tax-deferred and penalty-free.

Small businesses come in all shapes and sizes, and so do the options for funding them. Based on your timeline, risk tolerance, credit history and other factors, the best option for you might be a single solution, like the Rainmaker Plan, or a combination of several options. Begin the search today - download our informative eguide, Innovative Funding Strategies for Entrepreneurs, and learn about the small business funding options that can help you realize your dreams of business ownership.

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Our mission is to make every Benetrends client our champion. For over 35 years, our Rainmaker Plan® has been tested and proven to work, providing a means for more than 17,000 entrepreneurs to achieve their dreams of business ownership, creating both jobs and prosperity. We are so confident in the Rainmaker Plan design that we stand fully behind our work, backing every client with our Rainmaker Guarantee.

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Information provided by Benetrends Inc. is not intended to be used as legal or accounting advice, or as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of legal or tax professionals, as appropriate, regarding the evaluation of any specific information, opinion, advice or other content.
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