…I quit another job and am wondering if I could use my 401-k to help finance my business.
My business is growing and I would like to pay down my line of credit from my house. Anyone know of a way that I could use the 401-k to help my business because I have to borrow more soon to do a complete buildout of the store. I have been working this business 14 months and quit my previous job 4 months ago (as planned).
The only way to get money out of the plan is to roll the 401(k) to an IRA and then you can take as much as you need. You will have to pay income tax and if you are under 59 1/2, a 10% penalty for early withdrawal. Or to make a withdrawal from the 401k, you have to qualify for a hardship withdrawal and your plan has to allow one. Some plans do not allow a hardship withdrawal. A hardship withdrawal may be made from a 401(k) only if the distributions is made on the account of an immediate and heavy financial need and the distribution is necessary to satisfy the financial need.
The determination of whether you have an immediate and heavy financial need is whether you have other resources reasonably available to the meet the need based on your specific situation.
The distribution will not be treated as necessary to satisfy an immediate and heavy financial need if it can be satisfied from other resources that are reasonably available. So what you have to do is make a written representation that the need can not be relieved by:
1. Reimbursement of compensation by insurance or otherwise.
2. By reasonable liquidation of your assets.
3. By stopping elective contributions
4. By other distributions or nontaxable loans from any other plans.
5. By loans from commercial sources.
The regulations state that the distribution will be deemed to be necessary to meet a financial need if you have obtained all other distributions and nontaxable loans currently available under all of your other plans.
Also, in the above cases, you still owe the 10% penalty for early withdrawal if you are under 59 1/2 and still have to pay income tax on the hardship withdrawal. So you need to do the calculation to see how much you need to withdrawal so you have the amount you need after you pay the taxes, assuming you qualify for the withdrawal.
If the above conditions are met, you can use the money for:
A primary home purchase Tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you) To prevent eviction from your home or foreclosure on your primary residence Severe financial hardship Tax-deductible medical expenses that are not reimbursed for you, your spouse or dependents. There is something called a non financial hardship withdrawal that avoids the 10% penalty, not the income tax, but you have to meet certain requirements.
They are:
1. You become totally and permanently disabled.
2. Your medical debts exceed 7.5% of you adjusted gross income.
3. A court has ordered you to give money to a divorced spouse, a child or a dependent.
4. You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later.
5. You use the amortization, initialization, or minimum distribution tables to take equal payments for 5 years or until you reach 59 1/2, whichever comes last. So for example if you were 57 you would have to make the withdrawals until you were 62.
Based on your question and your situation, you will not qualify for a withdrawal from your 401K. Your best bet would be to roll 401K to an IRA and then take as much as you need. Just remember if you are under 59 1/2 you will have to pay income tax, (your bracket may go up because you are adding the distribution to your income) plus a 10% penalty for early withdrawal. This could be as low as 20% or as high as 45%.
So you need to do the calculation to see if is worth giving up 20% to 45% of your account to pay down your line of credit from your house.
Remember if the line of credit is $100,000 or less and you used the money for home improvements, the interest on the equity line is tax deductible. This will reduce the tax you owe the IRS at the end of the year.
401k’s were not designed as savings accounts. For this reason, the government makes it very difficult to get money out of a qualified retirement account.
You can use your 401k money for anything. If you withdraw it before age 59 1/2, you will pay a penalty. The impact of the income taxes and the penalty effectively put the value of the 401k money at 65% of what’s in the account. That is, if you attempt to withdraw $100,000, then you will receive about $65,000 after income taxes and income tax penalties.
The taxes and penalties you’ll pay on the withdrawal will exceed any benefits you gain.
Ultimately, though, in infitesimally small instance that I am wrong, you should speak with a tax accountant or financial advisor.
use the money its yours but the govt gets 20% if you dont use it in 60 days. Invest in a bond fund keep the 20% and use the dividends and capitol gains to put into your business!
Gotta keep some sort of nest egg or retirement fund right?
It is a big decision.
Considering you already have a (inferred) high home equity debt, you may consider looking at the10% penalty as total paid interest on a loan and compare to available financing. Compare the total expected interest cost over the life of the loan in dollars rather than interest rate. If the costs of financing exceed 10% of the principal borrowed, then cashing in your 401(k) is – by the numbers – a better option.
All that said, liquid assets should not be used without absolute confidence they will not be needed. Cash is king and once a dollar is handed over that dollar is gone forever.
Good Luck!
Karl Sexton
Accounting On-Call
Accounting | Quickbooks | Tax | Bookkeeping | Payroll
Brandon – Riverview Fl
(813) 641-4262
http//www.AccountingOnCall.com