I am new here and have a question from my DH. He has a 401K plan at work and wants to quit work and open his own business using his 401K money. Is this possible? Thanks in advance.

normally when you quit a company, you are eligible for a distribution - depends on the document, when the distribution can take place. You are entitled to use the distribution for whatever you want - however, there will be 20% withholding up front. Since you talked about starting a business, that sound like the distribution would be large, which means at tax time you would have to make up the difference between the 20% withheld and whatever tax bracket you are in. In addition, there is a 10% early withdrawal tax (if you are not age 55 when you quit).
So, does that leave enough left to make it worth it?

Ouch! If he formed an S or C corporation, would that make any difference? Sorry or all the silly questions.

I'm confused. What does the Designated Hitter rule have to do with a 401(k) plan?

I think that a DH is generally old enough to qualify for an in-service (59 1/2) distribution. :-)

OK. I give up. What's a DH, and why would RCK assume that a DH is gernally at least age 591/2.

Since the DH is male, maybe DH is Daughter's Husband?

I'd hate to contribute to confusion any more than I usually do. I was just adding a little more humor to pax's interpretation of DH as the Designated Hitter, and saying that Designated Hitters are usually older guys, and eligible for 59 1/2 distributions.

quickfox,
It will make no difference about forming a corp or not. The distribution causes the taxable event and the 10% early penalty.

Thanks for the answers guys and DH is Darling Husband. This has really solidified our future, We were sitting on the fence and have decided to stick with the job--for now. Thanks again. quick

well Bless your sweet heart! (on the DH)
remember, you will always have to pay the taxes (the 20% withholding), but of course, the big difference comes whether you take all the $ at once or spread it out over retirement. spreading it out generally reduces the taxes. The big hit is the 10% penalty - and few enough 'common folk' if you will, realize that one exists, or can be avoided. That is a lot of $ in my books, and well worth avoiding at all costs if you can.

What if the new business starts a 401k plan and the owner rolls his 401k from his previous employer into it. Then he has an investment policy that says that you can invest in company stock. He swaps the money in the 401k for the stock and now the company has the money to invest in whatever it needs to get started. This avoids taxation.

Avoids taxation and generates a thorny nest of ERISA and SEC issues that cost far more to resolve than the entire cost of forming the business. This is a different thread, but I can't think of a worse way of trying to get around taxation.

actually Karen offers a possible idea.
start new company, have a 401k that allows loans, and then take a loan. No, pretend I mentioned that. I hate loans in retirement plans. (but it still is a possibility)

Tom's suggestion is more realistic, but only 50% of the account could be borrowed, we face the double taxation scenario common to plan loans, and are probably prohibited from lending to an owner/employee anyway.

You could do the rollover into the plan and have the plan buy the stock. Your lawyer can do this under your state laws. ERISA contemplates exactly this and there is a specific statutory PT exemption (ERISA 408(e)) for eligible individual account plans that have the "magic" language. A profit sharing paln is one type of eligible individual account plan. This language requirement is crucial and I have never seen it in a prototype document. If you do this then, depending upon the number of shareholders, you may have state or federal securities law issues. And you must value the stock annually - the appraisal must withstand IRS microscopic scrutiny. The other issues are all fiduciary issues if you currently have employees or hire employees in the near future. And in my experience it is the fiduciary issues which are the difficult ones to comply with especially the unstated requirement that competent second line management must be in place.