I talk to a lot of people who are trying to start a business. A common question is: should I use money from a retirement account to pay for start-up costs?
I think most advisors would say this is a bad idea, and I generally agree.
But in the real world, the typical person trying to start a business is in a tough spot with getting start-up funds.
Average people don’t have the thousands of dollars often needed to start a business just sitting in a savings account.
Also, most banks that I’ve encountered won’t touch a typical small-business startup.
So you’re left trying to get funding in other ways. That could mean asking family members for loans, tapping home-equity lines of credit, using credit cards, or yes – drawing money out of a retirement account.
Have a Plan
I would treat a withdrawal from a retirement account almost as if you’re taking a loan.
Note that some 401(k) plans allow people to take loans against their account. But usually you have to be an active employee. If you’ve quit the job and are working on your startup, a loan probably isn’t an option.
When I say “treat it as a loan,” I mean have a plan for getting that money back into a retirement account.
Same thing applies if you use a credit card. Have a plan for paying it back.
In my own case, I’ve funded some software and equipment upgrades with a credit card. I cringe at having done that, but I have a plan for getting the card paid off.