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Using your 401k or IRA funds to Invest in a Business Might be a Wiser Investment

Updated on February 6, 2014

Sky's the Limit

Invest in Yourself - Buying a Small Business

If you have a 401k/IRA plan it is very likely that the money in that account is invested in places where you have absolutely no control. It's even possible that you really don't have any idea where it's invested or how or why.

You see lot's of advertising by the big investment companies telling you to take their advice and let them tell you where you should invest your money. All the while these investment "professionals" have one goal in mind....don't do worse than average.

Many so called investment experts will tell you that in retirement you can only safely take out 4% of the amount of your 401k/IRA to live on. So if your 401k has $100,000 in it you can look forward to about $4000 per month income...really?

Important: This article focuses on buying an existing business using 401k/IRA funds, as opposed to starting a small business for a specific purpose. Buying an existing small business can enable immediate cash flow returns. With a start up business you could go months or years before the business turns cash flow positive. You could run out of money before the business turns cash flow positive. With an existing business you know the cash flow situation the day you buy it.

Can you do better than average?

You may be o.k. with saving for a long time to accumulate $100,000 only to have that yield $400 per month for your retirement but that's not good enough for me.

Many people are deciding to use their 401k/IRA retirement money to invest in a small business where they can control the return. (Yes, you can convert your 401k/IRA to investment funds for your use without triggering taxes or early withdrawal, see the link at the bottom for how this is done.)

There is a trade-off.............

You can leave your money in your 401k/IRA ignore it, hope it doesn't go down and if everything works out you collect your $400 per could invest it in a business, give the business a little attention (some as little as 5 -10 hours a week) and have the business generate $2,000 or more per month in many cases. (Time for a little quick math here. Your investment adviser might say you can safely take $400 per month but the business could yield you $2,000 per month. That's 700% above average compared to your "professional" financial adviser.) In addition, if you grow the business and improve the profits you will one likely be able to sell the business and get a return way above the 4% benchmark use by most investment advisers. It's a bit ironic that most investment advisers own their own businesses themselves.

Could you lose your investment in a small business? Sure, I guess you could..but is your 401k/IRA safer in terms of return if it's invested with strangers? You need to decide that.But profits in a small business are almost always determined by your ability as a manager. If you're a good manager you will create a valuable business.

What kinds of businesses might suit this investment objective? You probably want to consider business that can be managed with relatively low salary people, all the service done inside 4 walls, low ticket price but lots of customers and systems that people can manage from rather than calling you every 20 minutes for a decision.

Here are some examples of businesses that might fit. All of these have independent type and franchise type. I'd go with a good franchise because they are providing the systems and much of the training which means you don't have to:

  • Mens' Hair Cutting
  • Yogurt shops
  • Hardware Stores
  • Ice Cream Shop
  • Flower Shops
  • Computer repair
  • Health food stores
  • Self storage
  • RV park

There are many many other possibilities.

If you are interested check out the 401k/IRA conversion process then start a relationship with a business broker who handles the sales of the type of businesses that might work for you.

Start looking well before you intend to make a decision. You want time to learn as much as possible about the time and financial requirements so that your decision makes for a better return on your investment.

How to Convert your 401k/IRA for use to purchase a small business

The process to do this properly require professional assistance. Here is a description of the process requirements for use of your 401k/IRA.


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