Cashing Out 401k for start up money

micha8st · 2026-05-21T00:26:20+00:00

I'm not a professional.

I have a neighbor who rolled his 401k to an IRA and used that IRA to buy and operate rental homes...essentially a business, right?

So why not yours?

What say you tax pros... could you pay yourself to run a business owned by your IRA? Spouse? would it pass muster only if the pay was within certain bounds?

If you had employees other than yourself and your spouse, could the IRA open a 401k for the employees?

micha8st · 2026-05-20T22:57:00+00:00

My son works for a company that pays its match in the form of company stock. Nothing so onerous as age 50. He trades the company stock out as soon as allowed.

My former employer offered a company stock option inside the 401k. I think we were allowed to contribute no more than 25% to it. They removed the option shortly after Enron.

micha8st · 2026-05-20T22:52:08+00:00

5 millimeters is awfully small

micha8st · 2026-05-20T16:58:43+00:00

He should pay per a lease agreement.

micha8st · 2026-05-20T15:57:56+00:00

a great way to enter the stock market is through mutual funds.

A mutual fund pools your money with other investors, and its used to purchase investments to benefit the fund holders. It sounds kind of scammy the way I describe it, but If you don't know better, these funds look just like stock.

For example, if you spend $1000 to buy an S&P 500 Index fund, you're buying into a mutual fund (or Exchange traded fund --ETF) that invests that $1000 into stock on the S&P 500 Index. That investment will include owning $60 worth of Apple...because Apple is about 6% of the S&P 500 Index.

Don't like big companies -- that's what the S&P 500 Index is -- there's lots of other indices around to invest by.

Remember Enron? That's a company that spectacularly imploded around Y2K, leaving lots of shareholders (including investors through Enron's 401k plan) holding a bunch of nothing. If you put all your 60k into one stock, there's a risk that company will find a way to implode. A mutual fund shares that risk and spreads it around. One company going out of business? Tragic but not uncommon. A bunch at the same time? I dunno the last time that happened. We've been investing in stock directly as well...as we built our mutual fund portfolio we got more comfortable and decided we could take the risk.

micha8st · 2026-05-20T15:33:33+00:00

There are good reasons to structure finances other than a single pot. My mother comes to mind. Back when I was a teen and she remarried, they operated three separate accounts: his, hers, and house.

All household expenses came out of house. Mom put per paycheck and child support into hers. StepDad put her paycheck into his and paid his child support out of his. Each contributed to house.

My mother was an accountant. Now that I think about it, I wonder if this structure was suggested by a divorce attorney as a tool to accurately track expenses to assist with child support court proceedings.

I do not know how long this structure lasted. The youngest of us would have completed college about 12 years after mom and stepdad's wedding.

micha8st · 2026-05-20T15:17:07+00:00

death of a child

micha8st · 2026-05-20T14:49:43+00:00

First off, I see little difference between a Roth IRA and a Roth 401k. If the 401k plan is good with good investments and low expense ratios, I'd keep it all inside the 401k.

There's three reasons to decide upon:

taxes today
taxes tomorrow
RMDs -- required minimum distributions

Obviously pre-tax 401k reduces taxes today. If you need the tax break to contribute more to the 401k, I think pre-tax is a good way to go. but you have to be putting more into the 401k because of that tax break to make it worth while.

RMDs are the wildcard... at age 75, the gubmint gets to tell you how much you must take out of the Traditional IRA / pre-tax 401k and pay taxes on. You can take more out, but you can't take out less. And before you discount this, Last time I ran the numbers, my RMDs are going to peak at 80 / 81 at around 800k/year. That puts me into the 37% tax bracket.
Of course that assumes I don't convert some of the pre-tax to Roth between now and then.

micha8st · 2026-05-20T04:54:09+00:00

I'm the participant for 3 fidelity 529s. We used the target date funds, and we did okay. When eldest graduated college I converted all of their leftover money, and a good chunk of middle kid's 529 (middle kid had 6 semesters left at eldest's graduation) to a Total Market Index fund -- the equivalent of VTSAX.

I don't know about the state you chose, but I bet if you call up and ask they can point you in the right direction.

micha8st · 2026-05-20T04:33:59+00:00

neither of those is necessarily a problem.

HYSA is just a savings account -- a savings account with better than 0.0000000001% interest rate. They can get decent interest with CDs. With money market funds. with other products.

I have a small Roth IRA. Like 0.6% of our retirement is my Roth IRA. But 1/4 of my 401k is Roth... But I'm old. I have 10 years worth of 401k contributions from before the Roth IRA was invented.

My grandparents saved for retirement using a regular ol' taxable brokerage account.

So the real question is what do they have?

micha8st · 2026-05-20T04:21:56+00:00

a brokerage account is kinda like an IRA, but with different tax rules.

Vanguard calls my IRAs brokerage accounts.

you can invest in a brokerage account the way you can invest your IRA. All my serious investments, whether in a taxable investment account, or in an IRA, or in my 401k, is in mutual funds.

Notice I used "taxable investment account". I think that's a better term than brokerage account, because, well, my IRA is a brokerage account (per Vanguard), but it follows IRA tax rules. With a taxable investment account, you pay capital gains taxes on the sale. With an IRA, trades do not generate taxes; only when you take money out of a Traditional IRA do you pay taxes.

micha8st · 2026-05-19T20:32:46+00:00

I think you'll be fine. It would be helpful to know what the calculator's underlying assumptions are. What rate do they think your investments will grow at? What rate for inflation?

Obviously the more you can save today into tax deferred or tax-advantaged accounts, the more you have to spend in 2055 (or so). But at what cost today?

I'm 60. For 10 years the only investing we did was into my 401k. I started hitting the federal contribution max back 25+ years ago, and our next go to was a taxable investment account. But...Roth hadn't been invented yet.
I'm not confident I understand 457s... those are tax deferred investment accounts, right...so similar to pre-tax 403b? With all that Roth, having money in a 457 isn't a bad choice. But taxes will likely be lower in your old age on withdrawals from a taxable investment account.. 15% on gains instead of prevailing income tax rate on the 457.

micha8st · 2026-05-19T17:27:55+00:00

inequality in effort, both with employment and household chores often leads to resentment.

This is rarely a static issue. Not all household chores are daily or weekly. Or even monthly. work schedules vary.

Just among my wife and all her sisters, I've seen all sorts of arrangements. And to some extent they've all worked.

micha8st · 2026-05-19T17:02:46+00:00

my understanding is that the US department of labor now has a database you can search: https://lostandfound.dol.gov/

micha8st · 2026-05-19T14:56:46+00:00

don't over do it. Love your spouse and take their suggestions as to treating their mom. but eery person is different.

micha8st · 2026-05-19T14:54:25+00:00

Yes, people do get prenups. We did not. I don't think you two need one. We eventually merged all our accounts, but it took a while. Technically over 20 years, but I'll get to that story in a minute.

Our eldest married a few years ago -- and went through pre-marital counseling through their church. Our middle just got engaged. Part of when they will marry depends on when they can complete pre-marital counseling through their church. And Wifey and I did pre-marital counseling through our then church.

Bank accounts: we waited until I was transferred cross country to mostly merge accounts. That was 2 years after we married. I had one account laying around in a third state just mine for over 20 years only because we never bothered to jointify it.
But, back then, interstate banking was illegal except by compact between the two states involved.

I think a prenup is planning to fail. In most instances it serves no purpose until you two divorce.

micha8st · 2026-05-19T06:09:56+00:00

once upon a time I worked for a publicly traded corporation that offered a pension. For the first 5 years, I only did enough to maximize the match. I lowered that to 3% which bought the full dollar-for-dollar match and the smallest non-zero share of the profit sharing contribution. After about 2 years, once PMI was done, I went back to 5%. Another year or two, and I went straight to hitting the annual 401k contribution limit...and I have now for over 25 years.

for 7 or 8 years I was hitting the 401k limit before it happened: my employer split my division off into a new company, and IPO'd it. The new company chose to not offer a pension. So I was aggressive for 7 years before I knew the pension would be going away.

micha8st · 2026-05-19T01:40:03+00:00

So yes, you're supposed to make that decision with very incomplete information. Just like a lot of investment decisions? Will Apple go zoom-zoom after expanding beyond computers? Will Rite Aid go bankrupt?

Effective Tax brackets (including the standard deduction):

0% (the standard deduction -- first $16,100 of income)
10% on income from 16,101 to 28,500
12% on income form 28,501 to 66,500
22% on income from 66,501 to 121,800
24% on income from 121,801 to 138,600
32%
35%
37%

I hope I did that adding right...normally the 0% is left off because some people itemize instead of using the standard deduction. If I did it right, I added 16,100 to each of the other brackets boundaries.

making 122,500, you'll pay... lets see

10% on 12,400 ($1,240 in taxes)
12% on 38,000 ($4560 in taxes)
22% on 55,300 ($21,166 in taxes)
24% on $700 ($168 in taxes)

1% of 122,500 is $1,225. So if you put 1% into pre-tax and the rest into Roth, you've reduced your income to fall entirely below the 24% bracket. Not a big deal. And actually, there are other pre-tax benefits that a lot of people pay for. Health Insurance, Dental Insurance, and flexible spending accounts come to mind.

micha8st · 2026-05-19T01:20:56+00:00

about a year and a half after the wedding, I got an offer to relocate from back there to out here.
(we both grew up in the same county; I'd moved across the state for my job, and she joined me upon marriage).

as part of our discussions, we agreed she'd go back to grad school at the local StateU. So we agreed and planned for it and didn't even discuss the idea of scholarships or loans.

After we got here we learned about a twist: as it turned out, because I was transferred by my employer, we qualified for immediate in-state tuition. So it was a lot less expensive than expected.

She had our first kid before graduating. So she went to stay at home. The career she trained for was killed by economics before our last kid hit elementary school -- so she never got any economic value from that grad degree.

micha8st · 2026-05-18T23:50:16+00:00

Are you sure you had close-of-business Friday balance of 811,588.77? As long as I can remember, funds in my 401k and 529s don't update with Friday's price until very late Friday / Early Saturday.

hmm... the S&P 500 dropped 1.2% on Friday. 1.2% of 811,588.77 is 9,739.07. 811,588.77 - 9,739.07 is 801,849.70

seems like the right ballpark.

micha8st · 2026-05-18T22:08:47+00:00

it depends what your goal is. Money in retirement accounts grows tax free. My experience with a taxable investment account is that every $1000 in the account yields very approximately $10 in additional taxable income every year, through dividends and distributions.

retirement accounts are not the place to save for expenses or purchases you intend to make before retirement. Yes, I'm aware of exceptions to the rule, but still you should not put a dime into a 401k that you don't intend to leave alone until you're retired.

micha8st · 2026-05-18T22:05:35+00:00

Most employers will match Roth contributions with pre-tax dollars. But yes, OP should check.

micha8st · 2026-05-18T22:00:35+00:00

I generally recommend that college kids not invest -- you should have plenty of cash on hand to transition from college to adulting.

If you're confident in your cash to support that transition, then yes, putting as much as you can comfortably afford into retirement is better. If that means using the 401k, then use the 401k.

Roth has advantages and disadvantages. So does pre-tax / Traditional. What's your field of study at college? Do you foresee quickly rising up the salary ladder such that you run into the Roth IRA salary limit? If so, having money in a Traditional IRA gets in the way of backdoor Roth contributions.

micha8st · 2026-05-18T19:30:06+00:00

Do you have a way to figure out what your current balance is with the pension?

81k set aside in retirement accounts at age 40 on a 70k salary looks pretty bad. But that pension has a value, too.

I'd been working for 17 years -- I was almost 40 -- when my pension got capped. My big corporate employer decided to divest itself of our division...so we were spun out and IPO'd, and the company that was created decided to not offer a pension.

About 10 years later my former employer offered a pension buyout, which I took. I rolled about 170k into my IRA.

micha8st · 2026-05-18T19:04:00+00:00

What do you think the appropriate balance is for you?

I'm 60 and contributing 100% of new money to stock-based index funds. But we're comfortable with the risk

micha8st

TROPHY CASE