Financing own business using 401k or IRA funds vs a Solo 401k Loan
In addition to information covered in this video regarding the differences between using your own retirement funds such as IRAs, 401k funds, profit sharing funds, government 457b funds, TSPs, defined benefit plans, 401a funds, and a pension plan to finance your own business, whether a franchise or existing business such as real estate operating company, vs a solo 401k loan, following are some more differences.
1. Because it is a loan, if you borrow from a solo 401k to finance your business the solo 401k loan must be paid back over a 5 year period. The solo 401k loan payments consist of fixed monthly or quarterly payments consisting of principal and interest.
2. Solo 401k loan interest payments are not tax-deductible.
3. On the other hand, if you transfer your former employer retirement funds and/or IRAs to a Rollover Business Startup PSP/401k (also known as a ROBS business financing/startup plan), the entire balance can be invested in your own existing or startup company. As a result, because it is not a loan but rather an equity investment, loan payments do not apply and thus no interest applies.
Click on 401k startup business financing to learn more about the ROBS regulations.
Click on solo 401k loan to learn more about the solo 401k loan rules.
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