I read an article in today’s USA Today that profiled several entrepreneurs who financed their business ventures with funds from their 401(k) accounts. Although the gamble has paid off – at least so far – for the business owners profiled, I think this type of action goes under the category of the adage “Just because we can, doesn’t mean we should.”
Now, I don’t mean to disparage any of these individuals, since using a 401(k) for start-up costs is perfectly legal. Under a ROBS loan (Rollovers as Business Start-ups), a new business creates its own 401(k) plan from savings in the owner’s individual 401(k). The “old” 401(k) money is used to buy company stock in the “new” 401(k), thus allowing the business owner to avoid early withdrawal taxes and penalties. Or, entrepreneurs can opt for a traditional plan loan.
However, I think both ideas are just too risky. I understand that entrepreneurs may feel like they have no other financing options, since banks still are being particularly tight-fisted. But I think using such means to launch a new and perhaps unproven venture – in a downturned economy, no less – ROBS Peter to pay Paul, so to speak. And in the end, I fear that using ROBS may cost business owners everything – their present livelihood and their future security.
Pros, let me know what you think about this – especially you financial advisers out there. Will ROBS steal entrepreneurs’ savings and their dreams? Would you/have you advised clients for or against them?
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