Should I withdraw money in a 401(k) to start a business? It's a minor sum that I've let sit for a while.

How big of a penalty/tax would I pay for withdrawing that amount?

Asked by Crystal

2 Answers

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Crystal, unless you are 59 1/2 years old or older, you will pay a 10% penalty to take the money out of your 401(k). That is on top of the taxes you will pay. So if you are in the 30% tax bracket, you will take a 40% hit to access the money. In addition, you will lose any potential growth on the money.

If you have access to other capital to start your business, I would suggest going that route. And if you would like to have a more detailed conversation about your situation, and what withdrawing from your 401(k) would look like, please feel free to reach out to me, my contact information is on my profile. | 12.15.15 @ 16:58
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 06:25
Answered by James Biasotti, Financial Adviser in Roseville, CA
Crystal many 401(k) plans have a loan provision. Basically it is a tax free loan that you pay back to yourself with interest as long as you are enrolled in the plan and working for the employer. If you ever leave or terminate employment then it could be callable although i have seen some companies continue payment plans even after termination.
these loans are more accurately described as the ability to access a portion (usually the lesser of 50% or $50,000) of your own retirement plan money on a tax-free basis. You then must repay the money you have accessed under rules designed to restore your 401(k) plan to approximately its original state, as if the transaction had not occurred.

That would be your cheapest and easiest route to take.

Jim
| 12.16.15 @ 00:50
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 06:25
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