With help, you can use your 401(k), 403 (b), IRA rollover or other retirement plan as capital to purchase a business while not triggering a tax penalty. These transactions are within the letter of the law as spelled out in the Employee Retirement Income Security Act of 1974 (ERISA).  The IRS has issued determination letters validating many of these plans.

If you just cash out your retirement account early, the premature distributions are penalized and taxed as ordinary income—resulting in a typical net of about only 50¢ on a $1. However, certain provisions of ERISA do provide a way to legally move money locked in 401(k) or other IRA rollover accounts directly into a new or established business without distributions, taxes, penalties or the use of loans.

To set-up this plan does require outside help.  There are several companies that provide this service.  Generally you can expect the set-up cost to be in the range of $4,000 to $5,000 with an annual maintenance fee of $800 to $1,000.  Obviously, the size of your 401k needs to be large enough that these fees are not exorbitant as a percentage of the funds being used. 

There are numerous firms that offer this service. Two of the largest are BeneTrends Inc. and Guidant Financial Group (we have no affiliation with either). We always suggest you look at several providers before committing to one.  Their websites provide more detail on this subject: 



Of course, just because you can use your 401k as the source of funds, does not mean that is the best way to finance a business acquisition.  Consider all your options (available liquid assets, bank/SBA financing, home equity) before committing to use your retirement account.