cashing in retirement to start a business

vlagrl29 · July 2014

I meant to post this article a friend posted on FB before we went out of town and now I can't find it. Basically, her friend left his 6 figure job with benefits and took out his entire 401k $$ to start a coffee business which is actually quite successful right now in our city. He doesn't regret doing it and his wife is supportive of it. She goes to our yoga studio and my friend that posted it is one of the yoga teachers there. Obviously being self employed and even myself as a self employed person, we really support entrepreneurs, but I couldn't fathom taking my retirement out to start a business, hoping it's successful. Luckily for him it is and he is hiring more people as of now. He avoided paying taxes or penalty on his retirement by rolling it over into a small business IRA. While a few people liked it, I was the only one that commented on it and said I wouldn't do it because I know I couldn't replenish the money I took out. I would say this guy is probably in his 40s. Could you guys do this?

hoffse · July 2014

Hell to the no I couldn't do that.

Even if his business is successful, it would have to be stupid successful to make up for the lost gains he is no longer earning with that seed money in his 401(k). I know the margins on coffee are good, but they can't possibly be THAT good when you consider overhead.

Xstatic3333 · July 2014

Agreed! The risk is way too high, especially given the early withdrawal penalties. I think people in general tend to be way too casual about drawing from retirement accounts.

daisy662 · July 2014

No way.

vlagrl29 · July 2014

yeah, I think you have to be a pretty good risk taker to do something like this and I'm not

jjbmstinco · July 2014

Nope. My mother did this. She took out 41K? to start a business our of her 401K. It was not doing well. She got a second loan out to continue. While it is improving, it isn't enough. She will probably lose all the money spent and have to close down sometime this year.

When you talk to her about it, she will just say "it was an adventure." umm ok? guess I will have to take care of you when you are old.

Happy to hear a different outcome from this guy's story.

vlagrl29 · July 2014

jjbmstinco said:

Nope. My mother did this. She took out 41K? to start a business our of her 401K. It was not doing well. She got a second loan out to continue. While it is improving, it isn't enough. She will probably lose all the money spent and have to close down sometime this year.

When you talk to her about it, she will just say "it was an adventure." umm ok? guess I will have to take care of you when you are old.

Happy to hear a different outcome from this guy's story.

That sucks

jjbmstinco · July 2014

Yes it does. They are not good with their finances in general, so it doesn't help. I finally stepped in to help in November. They seem to get a little bit of what I say, but once my mother has something in her head, there is no stopping her.

Maybe I can pawn her off to my brother?

:-j

Mom987 · July 2014

I wouldn't.

HoneyBee973 · July 2014

Absolutely not.

MommyLiberty5013 · July 2014

Nope.

jtmh2012 · July 2014

For every person that gets lucky, many others don't make it.

No way I'd ever take out of a retirement account for anything short of retirement.

KatieCutie05 · July 2014

Its the same idea as taking out a loan to start the business which ppl do all the time. Of course both are really dumb and I wouldn't do either one.

Xstatic3333 · July 2014

KatieCutie05 said:
Its the same idea as taking out a loan to start the business which ppl do all the time. Of course both are really dumb and I wouldn't do either one.

Hmmm I thought small business loans were really common and not considered a bad idea if you have a solid business plan. No personal experience with this of course since the idea of starting a business gives me hives. I'd just think it was a better way to go-lower interest than the 401(k) would be earning in the market, no tax penalties, and an underwriter has been convinced that your business has a shot.

jessica490 · July 2014

No, I would never touch it for any reason

brij2006 · July 2014

Xstatic3333 said:

Its the same idea as taking out a loan to start the business which ppl do all the time. Of course both are really dumb and I wouldn't do either one.
Hmmm I thought small business loans were really common and not considered a bad idea if you have a solid business plan. No personal experience with this of course since the idea of starting a business gives me hives. I'd just think it was a better way to go-lower interest than the 401(k) would be earning in the market, no tax penalties, and an underwriter has been convinced that your business has a shot.

I think that is more a bad idea because then you're already starting the business with larger overhead than needed. If there wasn't a loan on the business then it would likely thrive and strive longer because it can afford to stay afloat during the slow times. One with a loan payment is more likely to not be successful.

There's no way I would take out from my retirement to purchase/invest into anything that is more of a risk than the investment itself.

hoffse · July 2014

Business loans are very very common and aren't considered bad debt at all if it's done right. I would say that the majority of start-ups require some sort of loan. Start-ups require capital, and that's going to come from either equity or debt. If the business owner doesn't have the cash laying around, then they need to raise it from somewhere. It's hard to find 100% equity investors, and folks running the start-up often don't want to give up the kind of control that may be required to raise pure equity from external investors. That's why debt is usually part of the transaction.

I help form, buy, and sell companies all the time. We usually do a structure of part-debt/part-equity for cashflow and tax reasons.

But cashing out your 401(k) to raise that needed capital is a horrible way to start a business.

smbenevides1989 · July 2014

No way.

vlagrl29 · July 2014

It's much better IMO to save up to start a business than to cash out retirement for it. You can live 6-12 months not eating out, not living lavishly, and cutting bills you don't need and save that money to open your business. Having debt in general freaks me out.

juliebeannn · July 2014

vlagrl29 said:

It's much better IMO to save up to start a business than to cash out retirement for it. You can live 6-12 months not eating out, not living lavishly, and cutting bills you don't need and save that money to open your business. Having debt in general freaks me out.

DH and I have starting our own business (strength & conditioning gym/barbell club) in our 3-5 year plan. ^^ is what we plan on doing. Probably not as strict but we plan on saving money for the start up while he slowly builds his clientele through our garage gym.

Pretty close to NOTHING is worth cashing out my 401k. Nope. Nada.

purplehaze11 · July 2014

My mother borrowed against her retirement $ to start a new business. She left her pensioned job at 45 to pursue this. I thought she was crazy, but it has completely taken off. I will add, that she is a pharmacist and knew her demographic well before taking the plunge. She also waited until my brother and I were both financially independent, as it was something she wanted to do for awhile but did not want to take the risk with dependents. She now has a work to own deal with one of her staff, and is in great shape. That being said, I would NEVER risk it lol.

vlagrl29 · July 2014

My mother borrowed against her retirement $ to start a new business. She left her pensioned job at 45 to pursue this. I thought she was crazy, but it has completely taken off. I will add, that she is a pharmacist and knew her demographic well before taking the plunge. She also waited until my brother and I were both financially independent, as it was something she wanted to do for awhile but did not want to take the risk with dependents. She now has a work to own deal with one of her staff, and is in great shape. That being said, I would NEVER risk it lol.

I found out the way you don't get taxed or penalized is you move part or all of your retirement into a separate Ira that is used to invest in property. some of the profits that one makes from that business is put back into the account.

FabulousMrs.P · July 2014

No, I wouldn't do it. I don't think I would be able to sleep well knowing that everything I had was in that business...especially since when most small businesses start, it takes time to build up the business.

Kuddos to other people who do it successfully...I know I tend to be very conservative with our money and am just not a risk taker by nature.

cashing in retirement to start a business

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