FAQ - ANSWER

My husband currently has a 401k plan and wishes to quit working and open his own small business. Can he use the 401k money to open this business?

Answer: Once he has left the employment of his current employer, he can use the 401k funds for any purpose (no so if he remains in their employment). He will owe income tax and a 10% penalty (if not at least age 59 1/2). When the distribution is made, his former employer will be required to withhold 20% and remit this to the IRS as a down payment on the income tax and penalty due -- but this is rarely enough to cover the taxes, so be sure to set aside an additional 10%.

Here is an interesting article on the issue: Financing Your Business: A Case for Using Some of Your 401k