Financing; Home equity vs 401k vs other 3

[rlee53]

For the 1st year startup expenses, I am thinking that tapping into my home equity would be the best way to finance a startup, rather than pull out my 401k with my current employer and take the penalty and taxes hit.

Feedback or suggestions?

 

[powerhusker]

If you convert your 401(k) to a "single k" under your own business, then you can get a loan against up to 50% of the value.

While this takes the money out of the market, as you pay the loan back, the interest goes to the company, which in this case would be you.

It's kind of nice to get a loan and then pay yourself interest.

 

[GTstartup]

In my opinion borrowing from your 401K should be the second last thing you do with your $401k. The last thing would be taking a hardship withdrawal.

As Kbro stated, the money you borrow from "yourself" is no longer earning and this can cost tens of thousands in the long term. Also, and I think this is the real kicker, when you pay it back you pay it back from after-tax dollars and then when you withraw it at retirement you pay taxes AGAIN.

So $100 borrowed means you have to earn $120 to pay it back more or less.

Also, as far as I know, as soon as you quit your current job, your 401K loan becomes "due"

 

[rlee53]

As I mentioned in a previous post, I went with the home equity loan and so far feel that it was the right thing to do.

Also of note, after I started the business and set up a bank account, the bank was surprisingly helpful and I was able to get a small line of credit in the corporations name, $15K, from the bank. It's not a lot, but it's a beginning toward building credit in the company's name and I'm grateful for it.

Richard Lee

http://www.led-inc.com