Can I use 401(k) savings to start my own business?
Yes, you'll be able to tap those funds—at least temporarily. First a quick primer on the one-person 401(k): As with ordinary 401(k) plans, the one-person 401(k) allows small-business owners to invest a portion of their income on a pretax basis, and those contributions grow tax-deferred. But you can stash away much more: For 2005, you can put aside as much as 100% of your first $14,000 of income, plus an additional 25% of your total compensation, to a maximum of $42,000 (or $46,000 if you're 50 or older.)
The one-person 401(k) also offers loan privileges, says Eric Park, a financial planner with Steamboat Financial Group of Washington, Mo. So if you're starting a new business, you can roll over funds from your old employer's 401(k) into your one-person 401(k) and then borrow money from the plan. Of course, you'll have to repay the loan (with interest) to your plan, usually within five years. But, as Park points out, you won't pay any taxes or withdrawal penalties on the amount you borrowed. Under current regulations, you can borrow up to 50% of the assets in your solo 401(k) or $50,000, whichever is less.