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No. of Recommendations: 9
Starting business and need about $30k. Have almost $450k in my 401k and not sure(pros/cons) whether I should take small business loan or borrow from my 401k.

As already suggested, if you are leaving your employer to start the business, you will need to ensure that the 401(k) plan does not require immediate repayment for the loan. You will probably also need to take the loan out before you leave employment, since you generally have to be an active employee to take out a loan.

If you aren't leaving your employer, you need to be sure that they are okay with you starting a side business - many employers require that you get their permission to have additional employment.

Pros/Cons for 401(k) loan:
- likely a lower interest rate (probably around 4% - 6%, depending on your plan provisions)
- no credit checks/inquiries
- amortizing loan maximum of 60 month payback period, so you will be paying back principal with each payment
- huge financial penalties if you don't pay it back per the terms: taxes at your marginal rate, plus a 10% penalty (total of 22% - 48% for Federal, state taxes and penalties would be additional)
- cannot be a line of credit that you can potentially borrow/repay/re-borrow from

Pros/Cons for a business loan:
- likely a higher interest rate (probably 7% or more)
- will probably require you to have a developed business plan (which you should have anyway)
- may be able to get interest only loan
- credit report inquiries
- credit report hits if you can't pay it back, plus late fees and possibly a higher rate on the remaining balance
- may be set up as a line of credit that you can borrow/repay/re-borrow from

I will say - I would think that someone who has been able to accumulate nearly half a million in a 401(k) should be able to accumulate $30k in taxable accounts, and avoid borrowing, assuming that they are able to work at their current job for some additional time.

AJ
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