You may think of using retirement funds to purchase a franchise. Let's see if that is a good idea or not, shall we?

Legally, you can tap into your 401K to the extent of 50% of whatever is in the account. If you have less than $20,000, though, you can borrow $10,000. And you can't borrow more than $50,000 in any event.

Also, it's up to whoever runs your plan to determine the rules. Some plan administrators won't allow borrowing. Others cap payback periods. The law gives you five years to pay back such loans, unless they are for buying a house.  You will probably pay one or two points over prime as your interest rate.

Beware because if you don't pay back your loan on time, it is treated as a distribution. Distributions are taxed at punitive levels. First, you pay 10% as a penalty. Then, you pay income taxes on the money. So you really get hit hard with a big double whammy.

Also, unless you are borrowing for a business purpose you can't deduct the interest.

Now, I happen to believe that buying a business using retirement funds is a good idea in many cases. It depends upon your age. If you have a long time ahead of you when you can expect to work, I'd consider it. If you are older and don't have as many work years ahead of you, then obviously it is much riskier. If you lose the money you will have difficulty paying it back.

I read jim's blog at www.bargaineering.com. He has a neat article on borrowing on your 401K that you might want to read:

 

Here are the advantages of borrowing from your 401(k):

• It’s generally really easy, no applications, no credit checks, none of the annoyances with typical loan application processes.
• Decent interest rate, generally a point or two above the Prime rate, and that interest is paid to your own account anyway.

What are the disadvantages?

• That interest rate is usually less than what the account could earn on its own with the money, plus you’re paying it anyway so it’s not coming from the market.
• The loan payment taken from your paycheck might tempt you to reduce your contribution resulting in less in savings.
• If you leave your employer, for any reason, you have to pay back the loan immediately (or within 60 days). If you can’t, it’s considered a withdrawal and you’ll owe taxes and a penalty on it.
• The terms of the loan are set in stone and there might be some fees involved. You generally pay back the loan over 5 years, it’s more if you use it to purchase a primary residence (10-15 years).

So, should you borrow from a 401k? That depends!

Some things that jim doesn't point out: your retirement funds are generally exempt from being levied on by creditors and in bankruptcy. There are exceptions to this and you should always check with your tax advisor, but this is my understanding as it is part of the new bankruptcy reform law. So if you remove money from your 401K or other retirement accounts, the money you take out could be used to satisfy any debts you might have that you can't pay back.

Okay, but let's look on the positive side. Money you borrow from yourself…you may get a decent return on it. And if you need cash to buy a franchise, why not borrow the cash from a source like retirement funds. There is no qualifying and if you couldn't pay it back, well, it isn't the end of the world, is it?

If you are looking at a good financial franchise opportunity, and you believe in it strongly, go for it. Remember you could lose all your money and then some. If you have some money safely tucked away in your retirement account, you won't be losing everything because in general this money will remain safe from creditors.

I always like to look at the downsides of everything. And on the upside, if you are thinking about getting into a financial business you can run from home, learn more about the litigation financing business.