Differences Between 401(k) Loans & 401(k) Business Financing

If you are a new business owner looking to pay your startup costs, you have a few options at your disposal. Your 401(k) retirement account could be instrumental in getting your business off the ground. But what are your options? Look at the difference between 401(k) loans and 401(k) business financing to make the most appropriate choice for your situation.

401(k) Loans

As its name suggests, a 401(k) loan is truly a loan—you’re borrowing money that’s not immediately available to you, and you’ll incur interest as you pay it back. Check whether your company’s plan allows for loans against your 401(k). If so, you may be able to borrow up to half of the money vested in your account, but no more than $50,000. Over time, you’ll be repaying the money back into your account with interest.

However, if you plan on leaving your job soon, think twice before borrowing against your 401(k). Many employers’ plans require all debt to be repaid within 60 days of you leaving the company.

401(k) Business Financing

Business financing, also known as ROBS (Rollover for Business Start-Ups), is not a loan. 401(k) small business financing is a way to use the money in your retirement account without incurring interest or tax penalties.

How does that happen, though? There are a number of steps involved. In a nutshell, start your business and create a 401(k) plan for it. You can roll your existing 401(k) into the new one without incurring any penalties. The new 401(k) buys stock in your new business, and you can use funds from the sale of that stock to run your business and even pay yourself a salary.

Which Is Right for You?

A 401(k) business loan is like any other loan and carries with it the same terms. You’ll have to stay up to date on your payments to stay in good standing with the IRS, and you will be paying interest. If your business takes off right away, you may be able to pay off that loan more quickly and avoid paying too much interest.

401(k) business financing allows you to start your business off on the right foot with a solid 401(k) retirement plan for you and your employees. You don’t have to worry about interest or monthly payments, so it’s much easier to rebuild that nest egg.

Starting a new business is an exciting venture, and one that can improve your life and the lives of others. To start off strong, learn the differences between 401(k) loans and 401(k) business financing to make the best choice for you.