How to Withdraw From a 401K For a Business

When no other funding options are available, your retirement plan may be the only option you have to launch a new business venture. There are two distinct options when taking money out of a 401k to start a business, each with maintaining pros and cons. Taking a loan out of the retirement plan doesn't create a tax liability but does require continued employment. A distribution allows you to devote all your time to the new business if you want but comes with its tax issues. Examine both scenarios and speak with a tax adviser to determine what is best for you.

Funding Through a Loan

• 1

  Speak with a customer service representative at the number on your 401k plan statement. Ask whether a loan is an option for you since not every administrator opts to allow the IRS authorized loans.

• 2

  Obtain the loan application if loans are allowed. A 401k loan does not require a credit check or approval, so don't fear the application process.

• 3

  Complete the loan application for the amount you are taking and return it to the plan administrator. The IRS allows you to take a loan of up to $50,000 but not more than 50 percent of your 401k account assets. So if you have only $25,000 in the account, $12,500 is the maximum you can collect.

• 4

  Remain employed and pay your loan back consistently. Most loans are repaid through payroll deductions.

Funding Through a Distribution

• 1

  Speak with a customer service representative of the 401k plan administrator.

• 2

  Request a distribution form. You are allowed to take your money out at any time, regardless of whether you are employed.

• 3

  Complete the distribution form, taking out the amount you need. It is best to take out only what you need to avoid taxes on money you don't yet need for business operations.

• 4

  Mark the box on the form indicating whether you want taxes taken out of the distribution (net distribution) or whether you will take the taxes out later (gross distribution).

• 5

  Sign and submit the form to the administrator.