A few weeks ago we discussed using a loan from your 401k plan to fund your startup. With a 401k plan, the employer often provides a match to the employee’s contribution. Both IRAs and 401k plans are consider defined contribution plans, meaning the contributions are fixed, but the returns are based on the returns from the investments made.
This is in contrast to fixed annuities, such as social security and government retirement benefits, which are known as defined benefit plans. In these plans, the return is guaranteed and the contribution is not. If your employer offers a defined contribution plan with a match it is a no-brainer to take advantage of the employer’s generosity if you can afford the short-term cash flow hit.
Before you launch your start-up contribute as much as you can to maximize your employer’s 401k match. Assuming your employer matched you dollar for dollar to a defined maximum, when the value of the 401k exceeds at least two times the funds you estimate necessary to start your business, you can set up a 401k loan.
Since you can borrow up to fifty percent of the value of a 401k plan and pay back the principal and interest on the loan to yourself, you have essentially gotten your employer to pay your start-up costs.
Does your employer offer a 401k plan? Do you have the desire to own your own business someday? If so, why not get your current employer to pay your start-up costs?
