A lot of people dream of starting their own business, yet to make it happen often takes a large amount of money. While an effective idea and planning for possible risks matter, obtaining the capital to get their business going is a major difficulty for hopeful entrepreneurs.
It’s worth noting that more people are considering using their retirement savings as an option for investment. When you consider doing this, you should know the strength, weaknesses and legal rules involved.
This article looks at four options you can use to finance your new business using retirement savings. Remember, the information here doesn’t constitute financial advice made for you personally.
1. Borrowing from Your 401(k)
If loans are allowed in your 401(k), you’re able to withdraw up to $50,000 or 50% of the amount you have vested—whichever is the smaller. Most of these loans have to be repaid in five years using fixed payments made every three months. Typically, interest rates are higher than the prime rate by 1–2%; so, since May 2025 the prime rate is 7.50%, likely, borrowers will face rates above 8.50% and below 9.50%.
Benefits:
- You can access funds without early withdrawal penalties or taxes.
- Interest paid goes back into your own account.
- You avoid high-interest business loans from banks or private lenders.
Drawbacks:
- You're limited in how much you can borrow.
- The loaned amount stops earning investment returns during the repayment period.
- If you leave your job, the loan may become due immediately, with penalties if unpaid.
2. Taking a Taxable Distribution
You can take money from your traditional IRA or 401(k), but you’ll owe a 10% penalty and pay tax on money taken prior to 59½. With a Roth IRA, you may withdraw your contributions at any time, free of charges.
Benefits:
- Simple and straightforward if you're over 59½.
- It’s not a loan—you don’t have to pay it back.
Drawbacks:
- Withdrawals reduce your retirement savings.
- You’ll lose potential tax-deferred or tax-free growth.
- Early withdrawals from traditional retirement accounts incur penalties and taxes.
3. Using a Self-Directed IRA (SDIRA)
A Self-Directed IRA allows you to invest in assets beyond traditional stocks and bonds—such as real estate or private companies. While it’s technically possible to use an SDIRA to invest in your business, there are strict limitations.
Benefits:
- Greater flexibility in investment options.
- Can be part of a broader diversification strategy.
Drawbacks:
- The IRA must be a passive, minority investor—less than 50% ownership.
- IRS rules prohibit direct involvement or benefit (IRC Section 4975).
- Mistakes can lead to severe tax consequences, including disqualification of the IRA.
4. ROBS (Rollover as Business Startups)
The ROBS structure is one of the few IRS-compliant ways to use retirement funds to actively fund and operate a business. This involves rolling over existing retirement funds into a new 401(k) plan set up under your new C corporation, which then invests in your company’s stock.
Benefits:
- No early withdrawal penalties or taxes.
- No borrowing limits—you can access the full rollover amount.
- You can work in the business and draw a salary.
Drawbacks:
- Requires a C corporation structure, which may not be suitable for every business.
- The setup and ongoing compliance are complex and typically require professional help.
- Corporate profits are taxed at both the corporate and shareholder levels (double taxation).
Which Option Is Right for You?
Putting your money into a business in retirement can help you feel in control and also adds new pressures. The approach will change depending on how old you are, what kind of retirement account you use and what you require for funding.
Evaluate the benefits as well as the risks before you continue. Choosing certain options can make your savings less vulnerable, whereas others may put your savings at risk if your company isn’t able to succeed.
Before taking any money from your retirement savings, talking to a tax specialist or financial advisor is a good idea to be sure you’re doing what’s best for you.
Final Thoughts
Starting a company is difficult and securing the capital needed is often one of the main problems. If you have a good idea for a business and aren’t able to get regular funding, carefully using your retirement savings could help you get going. Going in prepared with a plan is very important—so you know what losses you could face.
Author Bio
Donnell Stidhum, Private Pension Plan Consultant and Owner of Self Directed Retirement Plans LLC. Retirement strategist creating properly structured self directed plans providing unrestricted investment control for use in both traditional and non-traditional investments.
