There has been a lot of talk lately, from Joel Libava’s Franchise King blog to recent MSNBC article, looking at whether 401(k) retirements savings should be used to fund a new franchise. Many franchisors for obvious reasons like this idea, such as Westshore Pizza & Cheesesteaks who focuses their sales pitch as a great 401(k) investment.Use 401(k) money to buy a franchise? My legal and financial opinion is almost always a NO! It is too risky to gamble your needed retirement funds in a franchise. If you need to tap your 401(k) to buy a franchise, you cannot afford to buy a franchise. If your entire retirement life is already FULLY funded and you have plenty of cash, then use your excess cash for the franchise opportunity.
Professional investors always take a little cash off the table, and your 401(k) is what you took off the table. Keep it there, don’t risk it away. You could easily lose ALL your money in a franchise, but you couldn’t lose all your money in a 401(k) even if you tried. Additionally, a single unit franchise will almost certainly not make enough money to payout and match a six-figure retirement account in less than a decade.
Tax and Match Advantages – Big DifferenceIs 401(k) a good investment in the first place? YES! Since your 401(k) investments are done with pre-tax income, you are saving about 30% more than you would have with after-tax income. Plus, an employer match will nearly double the money that goies into your 401(k) than if you just invested the income from your final paycheck. Upon retirement, you can control the 401(k) withdrawals to minize income taxes. Even if the employer is not matching, the certainty of pre-tax investing is powerful because it is taken out automatically, but once the paycheck hits your bank it is much more likely to be spent rather than invested.