Invade your 401K for your business? Bad idea, but can be done without a 10% penalty or being taxed on the withdrawal.

We all know credit availability is non-existent in today’s market. We also all know that credit is the life blood of many business organizations.

Without previously established lines of credit, many business owners have failed, are failing or will fail. Without adequate capital, frequently from credit lines, the business world is under enormous pressure to find ways of replacing their credit lines that are now rapidly becoming extinct.

Without the availability of new lines of credit, new business start-ups or expansion plans are rapidly becoming  an endangered species, unable to be launched, starved from lack of available capital.

It is no wonder that many business owners, be they established, or wanting to start a new venture, are turning to their 401K to fund their business requirements.

Clearly a bad idea, as small business is very risky and the likelihood of failure so high that invading ones retirement fund is simply a bad plan as it risks something that should not ever be risked…your retirement fund.

However having stated the obvious, I also understand that given the option to either close up shop, not open the new business or expand the existing one,  or invade your personal 401K, many business owners are choosing to invade, supporting their business and hoping for the best.

Problem 2, the 10% penalty for borrowing out your 401K funds plus the approximately 40% tax. A sizable fee, a huge  tax and you have lost half what you withdraw. A huge loss and avoidable. Here is how to do it without triggering the 10% penalty or the tax created by borrowing the funds:

Instead of terming your withdrawal a loan, better to design it and term it an investment and purchase stock in your new venture or existing business allowing the 401K to INVEST IN YOUR BUSINESS by buying its stock as opposed to borrowing from your 401K and then lending or investing it in your business from your own check book, having taken the cash out personally as a loan and then distributing it into your business.

Allow the 401k to invest directly and you avoid the 10% penalty and the tax.

I understand the situation, you may have a viable business, capable of weathering the economic storm and yielding a reasonable return, yet without credit you may be headed for disaster thus a reasonable although dangerous decision may be to invade your 401K , never a good idea but under certain circumstances it is going to happen anyways thus we might as well do it without losing 50% of its value. This is how.