Retirement Loan

One way to get the money needed to invest in a franchise or is to take out a loan from a retirement account. Retirement account loans are limited to 401(k), 403(b) and profit sharing accounts. It is not possible to take a loan from a Simple, SEP, Keogh or Individual Retirement Account (IRA).

Retirement account loans are restricted to 50% of the vested balance or $50,000, whichever is less. The vested balance is the amount to which the account owner is entitled. Rules vary with each plan; according to some plans, an account owner might not be entitled to any employer contributions and associated earnings for a certain period of time. Retirement accounts worth $10,000 or less can have the entire balance withdrawn as a loan.

An advantage to taking a loan from a retirement account is that interest payments are paid back to the retirement account and not to a bank or other financial institution. Account owners who withdraw money from a retirement account in the form of a loan repay the interest directly into their account. Interest rates on retirement account loans are determined by individual plans, but generally are at least 1% greater than the prime rate.

Retirement account loans used to finance a franchise purchase must be repaid within five years. Regular equal payments must be made to repay the loan, though the frequency of the payments varies with each plan. Payments can be as infrequent as once per quarter, but more likely will happen each pay period (at least once per month).

It is important to consult the current plan administrator if an individual is interested in taking a loan from retirement funds. Plans do not have to allow for loans, and some do not. In addition, there may be restrictions that force individuals to repay the entire loan if the leave their current employment. This is certainly an issue for someone looking to purchase a franchise, as they likely would leave their current employer after purchasing the franchise. Another option would be to set up a loan-eligible retirement account in conjunction with the business entity for the franchise.