I need $10,000 to start a home based business, and the only money I really have is in my 401(k) account.   I know there's a penalty if I take funds out, but what else should I know ?

Generally, tapping into retirement funds to start a business is a bad idea.   As in most situations, though, you must look at the individual facts and circumstances, and consider:

•  the length of time before you retire,
•  the values, and types, of assets in your accounts,
•  your age, and
•  your income situation.

If you're under fifty-nine and a half years old when you take out funds, you're subject to a penalty of ten percent of the amount of funds withdrawn.   There are exceptions to this rule, so check with your CPA to determine if you meet any of those requirements.   In addition to the penalty, you'll pay income tax on the amount of the withdrawal as well.  

If you take out the $10,000, the penalty would be $1,000 and then there's the income tax on top of that.   If you're married and your 2009 taxable income--including the withdrawal-- is between $16,050 and $65,100, the tax will be at 15%.   That's an additional $1,500, for a total of $2,500.   Don't forget the state income tax, so your $10,000 could cost you more than $2,500, and then leave you without sufficient money to start the business.   Assuming you live in a state with no income tax, to net $10,000, you'd have to take a withdrawal of $13,333 and pay penalty and taxes of $3,333.  

This can be expensive money, but if you have time to rebuild the amount of the withdrawal, or if you have a large balance where the withdrawal won't impact your ability to retire when the time comes, it might be a reasonable--though, in my mind, a last resort--option.   If you have to liquidate assets in your 401(k) to fund this withdrawal, you should know which assets provide the best value to you, as well.

You may be able to borrow against your account and avoid the tax penalty and income taxes, but this alternative also has significant caveats.   Generally, you can borrow up to 50% of the amount of your contributions, up to a maximum $50,000. So in our example, you need more than $20,000 in your account to fund a $10,000 loan. If you stay with your employer while you're building your business, determine if your plan allows contributions while a loan is outstanding.   If not, you lose the growth in your account from your regular payments along with the current tax deduction.   If your employer provides a match for your contribution, factor in the loss of these additional funds, too.   Should you leave your employer before the loan is repaid, the balance due is a withdrawal and will be subject to the penalty and tax assessments mentioned above.

So borrowing from retirement accounts or taking a premature withdrawal requires serious analysis and soul searching to know what's available to you and how to make a good decision.   If you're considering this as an option, consult your certified public accountant for guidance