Adam Bergman

Founder, Tax Lawyer, Author

Ask ten founders how they paid for their first year and you’ll hear about credit cards, a relative’s check, and a bank that wanted three years of tax returns from a company that didn’t exist yet. The best ways to fund a small business startup in 2026 still include those familiar options, but the one most people overlook is the money already sitting in an old 401(k) or IRA. I’ve worked with retirement accounts as a tax attorney for more than 25 years, and below I walk through each major funding route, including how to put retirement savings to work without a tax bill or a penalty.

Comparing the Best Ways to Fund a Small Business Startup

Every funding source trades something away, whether that’s ownership, monthly cash flow, or a piece of your retirement. This is how the main options stack up side by side.

Traditional Startup Funding Options

Personal Savings and Friends and Family

Most founders start with their own checking account, and there’s a lot to like about it. You don’t owe anyone, you don’t give up equity, and you can move as fast as you want. The risk is that the same money is often your emergency fund, so one slow quarter can put your household in a bind. Money from friends and family carries a different cost. I’ve seen plenty of these arrangements work, but the ones that go well are written down with clear terms, whether it’s a loan with a repayment schedule or an equity stake with real paperwork behind it.

SBA and Bank Loans

The U.S. Small Business Administration doesn’t lend money directly. It guarantees part of loans made by approved lenders, which makes banks more willing to work with small businesses. The flagship 7(a) program goes up to $5 million, and SBA microloans cover amounts of $50,000 or less. The catch for a true startup is underwriting. Lenders still want to see a credit history, a business plan they believe, and usually some of your own money in the deal. A company with no revenue yet is a harder sell than an existing business looking to expand.

Angel and Venture Investors

Outside investors make sense for a narrow slice of businesses, usually ones built to scale quickly and sell or go public. If you’re opening a franchise, a restaurant, a contracting firm, or a professional practice, you’re unlikely to be what a venture fund is looking for, and giving up a meaningful share of ownership for early cash can cost you far more over the life of the business than a loan would.

Why Cashing Out or Borrowing From Your 401(k) Usually Falls Short

When founders realize they have retirement money, the first instinct is to withdraw it. That’s almost always the most expensive way to use it. A distribution is taxed as ordinary income, and if you’re under age 59½, the IRS generally adds a 10% additional tax on early distributions. Between federal tax, state tax, and that 10%, a $150,000 withdrawal can easily leave you with far less to actually spend on the business.

A 401(k) loan avoids the tax hit, but it’s small and rigid. Under the IRS plan loan rules, you can generally borrow the lesser of $50,000 or 50% of your vested balance (or up to $10,000 if half your balance is less than that), and you have to repay it in substantially equal payments at least quarterly over five years. Miss those payments and the unpaid balance is treated as a taxable distribution. There’s also a practical problem: many plans only offer loans to current employees, so if the 401(k) is from a job you’ve already left, a loan may not be available at all.

Using a ROBS to Fund Your Startup With Retirement Savings

A Rollover for Business Startups, or ROBS, is the option I wish more founders knew about. It lets you move eligible retirement savings into a business you own and operate without taking a distribution, so there’s no income tax, no early withdrawal penalty, and no loan to pay back. The structure relies on exemptions in the Internal Revenue Code and ERISA that allow a qualified retirement plan to buy stock in the company that sponsors it. The IRS has said that ROBS arrangements are not considered abusive tax avoidance transactions, though it watches how they’re operated.

How a ROBS Works

1. You form a new C corporation for the business.
2. The C corporation adopts a 401(k) plan.
3. You roll eligible savings from a traditional IRA, SEP IRA, SIMPLE IRA, old 401(k), or 457(b) plan directly into the new plan. Roth IRAs aren’t eligible.
4. The plan buys newly issued stock in your C corporation.
5. The corporation deposits that cash in its business bank account and uses it for real business expenses, such as build-out, equipment, inventory, payroll, real estate, or franchise fees.

Unlike a Self-Directed IRA investment, a ROBS lets you work in the business and pay yourself a reasonable salary. That’s what makes it a fit for someone buying a franchise or opening a shop they plan to run every day. I go deeper on the mechanics in How Does ROBS Work?

The Compliance You Sign Up For

The rollover itself is the easy part. The ongoing obligations are where people get into trouble. The IRS has been clear that a ROBS plan must file Form 5500 every year, because the plan, not you personally, owns the business, so the usual one-participant filing exception doesn’t apply. The company stock also has to be valued each year, and once you hire employees, the 401(k) has to be made available to them on the same terms. The IRS compliance project flagged plans that were amended to block new participants from buying stock as a qualification problem. Skip these steps and a legal funding strategy can unravel into a taxable distribution.

Backing Someone Else’s Startup With a Self-Directed IRA

Retirement money can fund startups from the investor side too. A Self-Directed IRA can buy shares or a convertible note in a private company, and if that company takes off, the growth stays inside a tax-advantaged account. The rule to respect is the prohibited transaction rules. You can’t use your IRA for a business you run, work for, or otherwise benefit from personally, which is exactly why a ROBS exists for founders and a Self-Directed IRA works better for passive investors.

The upside can be remarkable. One of our clients, Danny, put $5,500 of his Self-Directed IRA into a startup, and that stake grew to $13.5 million. Results like that are rare, and most early-stage investments don’t pan out, so I’d never suggest putting a large share of your retirement into a single private company. For investors who want this kind of exposure, IRA Financial charges a flat $495 annual fee for a Self-Directed IRA, with no fees that rise with your account value. I cover the structure in more detail in How to Fund a New or Existing Business with a Self-Directed IRA.

Final Thoughts

There’s no single right answer for every founder. Many of the strongest small businesses I’ve seen were funded with a mix, some personal savings, an SBA loan for equipment or real estate, and retirement funds rolled in through a ROBS to avoid taking on more debt than the business can carry in its first year. What matters is knowing every option before you sign a personal guarantee or take a taxable withdrawal you can’t undo. Your retirement savings are a real asset, and with the right structure they can build something you own today while still sitting inside a retirement plan.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.