Can You Use 401(k) Savings to Buy a Business?
Earlier this week, we sat down with someone who asked a question we hear from time to time: “Can I use my retirement savings to buy a business?”
The short answer is: yes, it’s possible — but there are important trade-offs to consider before taking action.
Our guest had about $100,000 in his 401(k) and wanted to explore ways to put it toward a business purchase. Because he’s under age 59 ½, here’s how the options broke down:
Can You Use 401(k) Savings to Buy a Business?
Earlier this week, we sat down with someone who asked a question we hear from time to time: “Can I use my retirement savings to buy a business?”
The short answer is: yes, it’s possible — but there are important trade-offs to consider before taking action.
Our guest had about $100,000 in his 401(k) and wanted to explore ways to put it toward a business purchase. Because he’s under age 59 ½, here’s how the options broke down:
Option 1: Full Withdrawal
- He could take out the entire $100,000.
- This would trigger both income tax and a 10% early withdrawal penalty.
- Based on his prior 12% tax bracket, the withdrawal would push him into a higher bracket, with the CPA estimating an increased tax bill of about $40,000.
- It’s important to point out that this $40,000 includes not only the penalty and taxes on the withdrawal itself, but also the higher tax on his regular earned income once the withdrawal pushed him into a higher bracket.
- That means his $100,000 balance would shrink to roughly $60,000 available for investment after taxes and penalties.
Option 2: 401(k) Loan
- He could borrow up to $50,000 against the account.
- No tax or penalty is due as long as repayment terms are met.
- Loan payments (with interest paid back to his own account) would begin immediately.
- The challenge: this creates a new monthly obligation before the business even begins generating income.
The Takeaway
Accessing retirement dollars can be tempting — especially when starting or buying a business. But as this example shows, $100,000 on paper can quickly become only $60,000 in hand once taxes and penalties are factored in.
Our guidance: before tapping retirement savings, build a clear, realistic business plan and explore all financing alternatives. Retirement funds are an important safety net and using them should only be done as part of a well-thought-out strategy.