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Principal put into a Roth can be taken out tax and penalty free, only gains are a problem. Roths are post tax, so I believe any gain distribution would just have the 10% penalty and not taxed. For the same reason, distributions would not put you into a higher tax bracket.

However, I would suggest you look at any and ALL other options before screwing with your retirement plans. People who make loans to startup businesses do so with the expectation that many of them will fail and they will not receive their principal back. I do not know the details of the law, but I recommend you get legal advice and consider bankrupcy (of yourself or your business, if separate) and consider how much of the debt can be written off. I know the recent bill (yay for lobbyist!) makes that harder, but you owe it to yourself to consider all options.

If the bank loses some of their funds, big whoop, it was a calculated risk. If you lose your retirement funds, that could alter your life permanently.
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