| Do you have a business idea, but do not have the | | | | that distribution will be recorded as income in that |
| capital to get it started and off the ground? Is this | | | | particular tax year. If you are normally in the 25% |
| the reason why you are thinking about starting a | | | | tax bracket, this distribution will most likely push you |
| business with 401k money? This is a very important | | | | into a 28%, 33%, or even 35% bracket. This new |
| decision to make, and you need to understand all of | | | | tax bracket will affect all income that you bring into |
| the implications first. I have worked in the investment | | | | your household for that tax year, including wages |
| industry for some time now and have given 401k | | | | from your current job. Lets say you now fall into a |
| advice to clients for years. Although, I am not a tax | | | | 35% tax bracket and are under 59 1/2, you will now |
| professional. Please consult your tax advisor for more | | | | owe the IRS $22,500. Nearly half of what your 401k |
| information pertaining to your individual case. With | | | | is worth. This does not include the additional taxes |
| that being said, I would like to take some time and | | | | you will owe on your current wages, because of the |
| give you the cold hard facts regarding this decision, | | | | higher tax bracket. |
| and the reason why I strongly discourage this | | | | You have to be very careful when you are |
| practise. | | | | considering starting a business with 401k money, |
| Any distribution that you take from a 401k or IRA | | | | because as you can see, it can be a very expensive |
| account will be taxed at your ordinary income tax | | | | way to raise capital to start your business. |
| rate. These rates range anywhere from 10% to | | | | I have another suggestion for you. One that will not |
| 35%, depending on how much money you make. | | | | require the need of taking a distribution from your |
| Keep in mind also, if you are under 59 1/2 years old, | | | | 401k or IRA account. Why not begin a home based |
| there is an additional 10% penalty paid to the IRS for | | | | business in online marketing. The cost to get started |
| taking an early distribution. | | | | is minimal, and the potential for creating a massive |
| Lets do some simple math. Lets say that you have a | | | | amount of income in a relatively short period of time |
| 401k account with $50,000 in it, and you are wanting | | | | is very high. I do not have to tell you how large the |
| to take a lump sum distribution to fund your new | | | | internet is today, and people are using its power to |
| business. Lets also use a middle of the road income | | | | create wealth for them and their families on a daily |
| tax rate of 25%. If you took that distribution, you | | | | basis. You just need to make sure that you find a |
| would owe the IRS $12,000 in additional taxes when | | | | good reputable company to stand behind you, and |
| you file for the next year. If you are under 59 1/2 | | | | give you the support and training that you are going |
| years old, you will owe an additional $5,000 for a | | | | to need to get off the ground. There are a lot of |
| total of $17,500. | | | | scams out there so try to steer clear of these types |
| Now here is where it can get even stickier. Lets say | | | | of companies. I am here to tell you that this is a very |
| that you take that $50,000 distribution. This will most | | | | valid option that is real and tangible. |
| likely bump you up a tax bracket (or 2 or 3), because | | | | |