401(k) plans help small businesses

Savings

As the economy shows signs of recovery, retirement savings are becoming a key issue for HR professionals in 2010. What's more, a new report out today explores how entrepreneurs are turning to 401(k)s to fund start-up businesses.

However, relying on retirement savings to fund a business venture remains a significant gamble. In fact, according to findings by the US Small Business Administration, only about half of small businesses survive at least five years and - as the recession hit two years ago - the number of small-business bankruptcy filings went up significantly (44 percent from the third quarter of 2008 to the same quarter in 2009) according to credit experts Equifax.

As Credit.com's Gerri Detweiler, puts it: "A small business is risky, and when you combine it with your retirement funds to launch the business, you are multiplying your risk. It's easy to get caught up in the immediate needs of your business, but the last thing you want is to have your business fail and have nothing for retirement."

Nonetheless, as a report on USA Today explains, 401(k)s are proving to be a lucrative option for start-ups. And according to the article, the reason retirement savings offer such a healthy option is because they could allow entrepreneurs the chance to start a business without getting hit by taxes and early-withdrawal penalties.

Crossroads

The advice, when looking to fund a new business with savings, is to take one of two routes. The simple option, according to analysts, is not all that different than a regular 401(k) loan and allows an entrepreneur to leave a corporate job and take the 401(k) savings from that company to the new business by establishing a plan in that business' name.

Analysts say that at that point, a traditional 401(k) loan can be taken from the new firm's 401(k) plan.

The other option is more complex, and is often referred to as a ROBS loan - Rollovers as Business Start-ups, so-named by the IRS.

And ultimately, while little reliable data exists about how many entrepreneurs use retirement nest eggs to start businesses, business analysts are pushing the idea as the ailing economy spoils many funding options.

Whether the trend will catch on remains to be seen: but the focus on 401(k) options looks set to continue. According to a report by the National Small Business Association, for instance, 39 percent of small-business owners said they were unable to get adequate financing last year, and more than the 22 percent said the same in August 2008, suggesting that - if there really is stability in the 401(k) funding model, analysts are likely to continue the push.

Matthew Buttell

Matt Buttell graduated from Bath Spa University in 2006. Since then he has written for several publications, before moving to the web. He now writes solely for the internet, continuing to cover key

business issues while managing his own personal blog.

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