Many Americans dream of being their own boss. If you've been diligently saving for retirement for decades but aren't quite ready to take it easy in retirement, this might be the time to launch a second-act career. It is possible to use your retirement savings to start a new business or buy a business, but it takes some consideration before acting. There are pros and cons that come with this decision, and it is important to understand the implications of this action before jumping in the deep end.
Understand the Risks
The greatest risk in using your retirement funds to start a new business is the fact that your gamble could go wrong. Your business may fail or may prove to be less-than profitable in the long run. You may earn money, but it might not be enough to make up for the money you've invested in it. This could put your ability to retire at any point in the future at risk. Additionally, you will face additional taxes as a business owner and must file separate personal and corporate taxes each year. MarketWatch notes that when using borrowed retirement funds to start a new business, you're required to form a C Corporation.
Additionally, by removing money from your retirement savings to fund a business you'll be missing out on the gains that money could have made. Yes, you could make up that money if your business is profitable. But business profits don't enjoy the benefit of compound interest like your retirement accounts do.
Know the Benefits
There are two sides to every coin though, which means there are benefits to using retirement funds to start a new business. First and foremost, retirement savings offer an alternative to traditional loans. This money is your own and you don't have to qualify with good personal credit or prove you have positive cash flow to repay the money in order to access the funds. Depending on the type of withdrawal you make from your retirement savings, you won't end up taking on new debt.
Avoid Taxes and Penalties with a ROBS
Using a ROBS loan to remove retirement savings and start a new business is the smartest path forward. Other 401(k) loans need to be paid back within a certain period, and if you cannot do so the loan is considered in default. As such, you'll face taxes on the outstanding balance and early withdrawal fees if you aren't 59 ½. Also, simply removing funds from an IRA plan results in income taxes on traditional IRAs and early withdrawal fees on both traditional and Roth accounts if you're under 59 ½.
However, if you use a Rollovers for Business Start-Ups as a means of borrowing from your 401(k) or other retirement accounts, you avoid a lot of the hassle and risk involved. When you borrow with a ROBS plan, there are no taxes and penalty fees involved. You get your money to use how you see fit launching and running a business.
The views expressed are not necessarily the opinion of Social Advisors, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.