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If you have a substantial amount of money on your retirement account, can you use it to fund a startup? Would this be a wise idea? I appreciate the advice.

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I assume you are talking about a 401(k) or an IRA. Technically, you can take money out of this to fund a startup, but I would highly recommend otherwise.

First, remember that if you invested pre-tax, the government is going to want their share. If you are below 59 1/2 years old, there is a 10% penalty. Then, they're going to charge taxes on top of that. So, depending upon your tax bracket, the government is going to take anywhere between 30% and 50% of your money.

In addition to that, it's a risky move to put all your eggs in one basket like that. What happens if your business doesn't succeed? Then, not only have you lost your job and your income, but you've also lost your retirement. That's a pretty scary proposition.

If I were in your shoes, I would save my retirement money for retirement.

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You may specify where you live. I know that in Canada this is impossible to do. I don't think you'll find a particular deference on this in America.

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Sorry, in the East coast of the U.S – Abbie Colman Nov 20 at 19:44
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This IS theoretically possible. You can withdraw money from your retirement account and potentially subject yourself to taxes and penalties on the money, as previously mentioned.

Alternatively, depending on the type of account, it is possible to direct money in your retirement accounts to a company that you start up. If it's a C corporation, the retirement account would (hopefully) get dividends and capital appreciation.

If you want to invest retirement account money into a pass-through entity (partnership/S corporation), this is quite tricky. It's possible to do, but business income would flow through to the retirement account and the tax treatment of this is not 100% clear (there was a recent tax court case on the issue). At a minimum, the business income generated would likely be considered unrelated business taxable income to the retirement account and the account would have to pay taxes on the money.

People tout using money from retirement accounts to invest in all sorts of things (real estate, companies, etc.). This can be very tricky. Additionally, plan administrators often don't allow you to do this OR charge very high fees to invest in non-traditional assets. Beware and proceed cautiously.

If you want more specific advice, please contact me. www.ninjatax.com

In accordance with Treasury Circular 230 (31 CFR part 10), please note: any information contained in this post is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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