401K for business use

[pmkuon]

I have been gathering info about using my 401k from previous employer to open a business. Costs seem high (about 3 grand) but the no debt porition seems nice. What is the down sise of doing this. Basically they take the money and sell stock in the company, the stock becomes the ira and the business owner gets the cash to use.

[gar1976]

Ohhh....don't cash out your 401(k), unless you're 59 1/2 years or older. If you do, you're going to get hit with the following:

Federal income tax
State income tax
10% excise tax for early withdrawal in addition to tax

Why not have debt? Money is cheap with the low interest rates we have, and you can leverage that to higher earnings.

Let's see if I remember my finance classes here....

Say you put in 10,000 to start a business, and plan on earning 7%. You're total income for the year - $700. Amount you have invested - $10,000.

Next scenario - you put in 5,000 to start a business, and borrow another 5,000 at 5%. You again earn 7%, or $700 total. You then need to pay back $250 in interest. Total earnings - $450. Total invested - $5,000. Your return on equity - 9%. This is called leveraging.

This works as long as your income % is larger than the interest cost on borrowing. Anyone who is currently in a finance class and find any errors, let me know.

[pmkuon]

I apparently need an education about these things. Any good books etc that you can recommend?


Thanks for the advice. May harrass you again in the future.