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DunceCapDitz · Aug 31, 2007, 04:31 PM

Here's my situation:
I'm 40 years old, I have roughly $140,000 in my 401K including $16,000 left to pay on a 401k loan.
I have an oppourtunity to open my own business and want to quit my job of 16 years and cash in my 401k to use as capitol.
How Much would I lose in penalties and interest? 30-35%?

ScottGem · Aug 31, 2007, 04:34 PM

You will lose over $15K in penalties. In addition you will need to pay taxes on $156K of income for the year.

I strongly urge against this.

DunceCapDitz · Aug 31, 2007, 04:45 PM

Is there any other way I can avoid the penalties yet still use the money as capitol? Like transferring it to another type of account that will let me borrow against it paying myself back?

ScottGem · Aug 31, 2007, 04:46 PM

Not that I know of. Only 401Ks permit such loans.

Wondergirl · Aug 31, 2007, 05:05 PM

Don't cash it in!! When you are 62 (and yes you will get there faster than you can imagine!), you will be so very glad you still have that money.

Don't quit your job until you have a small business all figured out. Too many fail from lack of planning.

What would the new business be?

DunceCapDitz · Aug 31, 2007, 08:08 PM

I'm opening a bike shop. I have everything worked out, business plan, minimum starting inventory, location etc. I just need the $$ to get it going. I have a friend who currently owns a shop who is helping me set everything up.
Retirement? - this will be my retirement, doing what I love, not what I have to.

Fr_Chuck · Aug 31, 2007, 08:21 PM

I guess starting and working for yourself is the american dream, and I guess you have looked at all the costs and have operating expenses and living expenses planned for at least a year, most businesses make little or no profit the first year plus we are getting into winter which I have to guess is not the prime bike time of year.

But then many people follow their dreams, If you go into this understanding in 2 to 3 years you may be broke, no savings, no retirement.

You are asking from a money sense, this is a bad idea, most small business fail and most end up losing everything, their home, business and end up bankrupt. So if you ask, we have to say don't do it, but in the end it is your choice

Wondergirl · Aug 31, 2007, 08:47 PM

Originally Posted by DunceCapDitz

this will be my retirement, doing what I love, not what I have to.

You mean selling bikes to someday have a business in the black, or messing around with bikes? I'm from western NY. I can't imagine that there's a big demand for bikes where you live.

What is the demand for bikes in your area?

Where will you get the money to live on during retirement?

DunceCapDitz · Aug 31, 2007, 09:45 PM

Selling bikes is only part of the business, most of the money made in bike shops is through service. But Bikes aren't the only thing found in a shop, you need to have an income during the winter also and most shops do snowboards, X-country skis and accessories. I'm going to sell high-end skateboards as well. Once the business starts to show a profit I plan on having some sort of IRA or other retirement fund. But really, I am planning on doing this until they put me in a box.
There is never a big demand for bikes, bike shops aren't money makers by any stretch of the imagination. But if you love what you do and don't really care about driving a gas guzzling SUV or an overpriced BMW, then why not do it if it's what makes you happy and it eventually makes a small profit.

Wondergirl · Aug 31, 2007, 10:29 PM

I've always done what I love, but the money didn't follow. I hope you continue paying into SS so you will have that at least. And I hope you are resilient, since Life doesn't happen the way you plan it to.

ScottGem · Sep 1, 2007, 06:27 AM

The only part about this that really bothers me is that you are throwing away money. Between penalties and taxes, you are throwing away at least $40K, maybe more. Think about how long it will take to make that back. I understand the part about following your dream, but cashing out a 401K should be a last resort.

AtlantaTaxExpert · Sep 4, 2007, 08:17 AM

I STRONGLY recommend that you do NOT touch your IRA.

If you have a solid business plan, then apply for a Small Business Administration loan. That way. Your own money (and retirement) is not at risk.