401k to fund start up business

I’m considering using my 401k funds through my day-time employer to fund my own part-time startup business and have a few questions for you.

QUESTION 1: I called my employer and spoke to someone in the HR Department and they said that I can’t use funds in my 401k to fund start up business or in any investment outside the mutual funds offered under the employer 401k plan.  Are they allowed to do this?

ANSWER:  While the 401k regulations as outlined in ERISA and the Internal Revenue Code permit 401k plan investments in company stock of a C-Corporation, real estate, precious metals, equities, etc., it is ultimately up to the employer sponsoring the 401k do dictate which investments may be utilized by the participating employees. Therefore, it sounds like your employer has elected to only allow mutual funds under the 40k plan.

QUESTION 2:  I even thought of taking a distribution so that then I can use the funds in my 401k to fund my start up business but they said that I can’t even do that because I’m only 43.  Can they keep my funds locked up like that even though it’s my money?!

ANSWER: Unfortunately yes they can restrict you from having access to your funds for any reason including using your 401k to fund startup businesses unless the 401k plan document allows for transferring out profit sharing contributions (also known as employer contributions). However, the employee contributions (also known as salary deferrals) may only be distributed if you meet a 401k distribution triggering event such as the following:

  • You are age 59 ½;
  • Separate from service (quit your job); or
  • Your employer gets bought out by another company.

Note that I did not mention a 401k hardship distribution because even though it is a distribution triggering event the rules would not permit you to rollover the funds to an IRA or another 401k. Instead, you would have to use the funds for the applicable hardship situation (e.g., payment of past due medical bills).

Lastly, if you have IRA funds, you may want to consider using those funds to invest in your part-time business venture as they can be rolled over to a 401k that would be sponsored by your C-Corporation start-up business. The rollover funds would then be used to purchase stock shares in the C-Corporation resulting in funding capital for your startup business.

Thanks, Wendy R. in Florida

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 18 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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