Starting a business with your retirement funds.
What options are available to obtain funding to start a small business? Is borrowing from retirement funds a good place for funding to start a business? How much will be needed to be borrowed? Are there penalties?
Borrowing from your retirement savings may not be a bad idea. Most plans allow you to borrow up to 50% of the value of your account. Generally, this is penalty free, as long as you pay the loan back in a timely manner.
Early withdrawal penalties would be in affect and can be somewhat costly if the loan were not paid back.
One-third of small businesses fail in the first two years, according to the Small Business Administration, and a little more than half fail within the first five years. All in all the main objective would be to make sure that you have sufficient funding to cover the start of a new business and also keeping afloat during the rough years.
Keep in mind that because you would be borrowing money from your retirement, you will need to pay back the interest. However, this should be at a competitive rate, usually prime plus 2%. This will enable you to replenish the loan without losing capital gain. Most plans require a relatively swift payback, around five years.
Another drawback is that the money you take out of the account will be suspended from growing tax-free until you pay it back. Say you borrow at 5%, but the account earns an annual average of 8 to 10% during the time you are paying back the loan.
It really is not some huge secret. One of the most popular sources to start up a business is the personal savings, retirement. The biggest thing is to keep in mind the overall result.
Say you can start up your business with $30,000. That is enough to get you to where you can start making money. Now let us assume you have a savings account with $20,00 and $20,000 in your retirement savings (401k).
Where do you get the money? Keep the payback and interest in mind. Weigh out the least amount of loss. You can do this by borrowing where you will not be losing the gained interest. Usually the best choice would be to not use the retirement funds and instead use your personal savings.
What ever you choose, there are some basic rules of thumb to stick with. In the end, these rules will help keep you afloat through the rough times. Because you can use your retirement funds to start, a business but you will still need to make that money up to protect your future.
There are some great advantages to using retirement funds for the start up of a business.
It is easy to qualify because you are using your own money. It is usually relatively fast to set up. You will get a favorable interest rate. Payment is much easier. Therefore, either way there are the pros and cons.
While some financial planners say they would almost never recommend that a worker borrow from his or her qualified retirement plan, others say there can be exceptions.
Using your personal savings and retirement funds is a possible solution for funding to start a business. Be careful and consistent with costs, needs and wants. Spend wisely and borrow as little as you need to.