As access to loans becomes scarce, some middle-aged entrepreneurs are betting their retirement funds on small-business ventures.
About 16 percent of small-business owners have taken premature withdrawals or borrowed from their retirement accounts, according to a recent online survey of 512 small-business owners by Harris Interactive and ING Direct. "Raiding your retirement should always be a last resort," says Stuart Robertson, general manager of ShareBuilder 401k, a subsidiary of ING Direct. "But, given the tough access to cash and credit ... some small-business owners have made that difficult choice."
Withdrawals from retirement accounts are generally taxed and, if the owner is younger than 59½, an early withdrawal fee also applies. The Wall Street Journal describes how to tap an IRA or 401(k) to fund a start-up without having to pay taxes or penalties here, but cautions that the advisers necessary to help most people set up this type of arrangement are likely to charge several thousand dollars—and they levy hefty annual fees.
The New York Times recently profiled several small-business owners who dipped into their retirement accounts, including a 46-year-old who invested $150,000 from his IRA to buy a liquor store and another 46-year-old who rolled over $80,000 from his 401(k) into a profit-sharing plan that allowed him to buy a franchise and provide working capital for his business. According to the article:
"These business owners are effectively treating their start-up ventures as any other stock in their 401(k) portfolio, and in the process they are providing seed capital for their own budding enterprises. In some cases they are even paying themselves a salary as their businesses start generating cash. It's a risky strategy, one that has business owners essentially betting their retirement on their company. But beyond that, it is controversial, considering that the same person is serving as financier, chief executive and salaried employee. And because it is all being fueled by pretax retirement dollars, the tax consequences are unclear."
If your start-up should fail, and most do, you lose the chunk of your retirement savings that you invested. Middle-aged and older business owners would then have little time left to build up a new retirement fund.
Tell us, would you ever invest your nest egg in your own business?