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By Benetrends • July 18, 2019

Can I Use a Self-Directed 401(k) to Fund My Business?

Interested in starting your own business but wondering where the money will come from? You are not alone.

For many entrepreneurs, traditional funding mechanisms are not available or viable options. You may not have the credit history or credit score to qualify for a traditional business loan. You may not want to incur the monthly payments, high interest rates, and onerous payback schedules that bank lending requires. Your savings may not be enough, and you do not want to finance the business on your personal credit cards.

It leads many entrepreneurs to ask, “Can I use a self-directed 401(k) to fund my business?

The answer is yes!

Defining the Self-Directed 401(k)

Self-directed 401(k)s are designed to provide their owners with the flexibility to make investment decisions in the assets they prefer. They are an ideal choice for those wanting flexibility and control of their financial decisions. Unlike self-directed IRAs, they can also be used as part of a Rollover as Business Start-Ups (ROBS) strategy to fund your business.

Related article: ROBS, The Best-Kept Secret for Funding Your Dream Business

To be eligible for a self-directed 401(k), you must be the sole proprietor and have no other company employees except your spouse. You can invest in a whole host of assets, including real estate, land, trust deeds, LLCs, LPs, receivables, stocks, bonds, mutual funds, and annuities. For the purpose of business financing, the key allowable asset for purchase via a self-directed 401(k) is private stock offerings.

Many different types of retirement accounts can be moved into self-directed 401(k)s, including: 

  • 401(k)s
  • 403(b)s
  • Traditional, SEP and Roth IRAs
  • Qualified annuities
  • Keogh plans
  • Government-eligible deferred compensation plans
  • Coverdell education savings accounts (ESA)
  • Profit-sharing plans
  • Money purchase plans

You are able to transfer funds from these plans into a self-directed 401(k) to give you investment and checkbook control.

Woman holding an open sign outside her shop.

Advantages and Disadvantages to Self-Directed 401(k)s

Like with any investment and retirement strategy, there are advantages and disadvantages. 

Some of the advantages include:

  • Tax deferment. Contributions, investment returns, and earnings are tax-deferred until you withdraw funds.
  • Elective contributions.  All employees can contribute to the 401(k).
  • Investment control. You do not need to rely on a financial advisor to make investment decisions. You have control over your investment options as defined by the plan.
  • Portability. The plans can be rolled over if you change employers.

Disadvantages include:

  • Withdrawal penalties. Withdrawals made before 59 ½ may be subject to a penalty.
  • Company restrictions. Your company may set rules about eligibility requirements that can restrict who is eligible.
  • Administrative complexity. Creating and monitoring these plans can be complex and incur administrative costs.

Using Self-Directed 401(k) for Start-Up Costs

When you are looking to start your own business, using a self-directed 401(k) is a smart investment option. You can use your 401(k) to establish a ROBS strategy, which follows a simple process to get you the funds you need without costly early withdrawal or tax implications.

Benetrends has worked with small-business owners for decades to create ROBS approaches for thousands of successful entrepreneurs. To learn more about how a self-directed 401(k) can fund your new business, download The Definitive Guide To 401(k)/ROBS Business Funding.