3 Reasons Not to Cash In a 401k to Start a Business

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Reasons Not to Cash In a 401k

Reasons Not to Cash In a 401kAs you’ve contributed to your retirement accounts year after year, you likely have a good amount of savings built up. Depending on how old you are, this could be a substantial asset in your portfolio.

Because of this, a 401k can be a very tempting resource to use as seed money for a new business. But before cashing it out, here are 3 consequences that could potentially sabotage your future and the success of your business.

  1. Paying a 10% penalty.

If you choose to withdraw funds from your 401k before the approved retirement age of 59 ½, you’ll be forced to pay a 10% penalty. This early withdrawal penalty fee will be taken out of the final amount you receive from the account manager, and sent straight to the IRS.

According to a 2011 report from Bloomberg Businessweek, the IRS earns nearly 6 million dollars a year in penalty fees from early withdrawals of retirement accounts. Don’t let them have your money! It may be tempting to raid your 401k for startup funds, but you should reconsider before giving away your hard-earned income.

  1. Losing out on tax advantages.

One of the greatest benefits to contributing to a 401k plan is that you can allocate a portion of your earnings directly into the account where they won’t be taxed as ordinary income. You may also be able to take advantage of an employer match bonus, up to a certain percentage of what you contribute. It’s like getting free money!

Depending on your income bracket, you might also qualify for a number of retirement credits on your tax return. So by choosing to withdraw these funds, you’ll not only be subject to paying taxes on the total amount, but also lose out on some great tax benefits.

  1. Forfeiting future retirement savings.

By taking funds out your 401k early, you’re not only forfeiting future money you would be putting into the account, but also any interest that would have accumulated on those funds. It’s like a double whammy; you’re borrowing from your future to fund your present goals, while missing out on potential future earnings.

If the market were to shoot up after you take the money out for your new business venture, you would be losing out on all that revenue. Long-term retirement account investments thrive on the magic of compound interest, and you’ll be forfeiting that future income.

Don’t Cash In Your 401k to Start a Business

When you look at the numbers and calculate how much money you’re losing in penalty fees, taxes, and interest income, you can see why you shouldn’t cash in your 401k funds to start a business.

There are other ways to get access to seed money without going this route. You don’t want to cripple your future while getting a new venture off the ground.